world's juiciest takeover targets, The

Global Finance, Jun 1999 by Leander, Tom

So who's next? It's been the greatest takeover market ever in the longest bull market in the United States. In Europe the onset of the Economic and Monetary Union has led to spectacular merger dramas, the most prominent being Deutsche Telekom's $81.52 billion offer for Telecom Italia, which represented the largest single bid ever. Companies may be selling for higher underlying values than ever before, but that doesn't seem to be stopping anybody Experts expect this year's M&A volume to top last year's monumental figure of $2.5 billion. Look at the high price that Michael Armstrong was willing to pay to snatch up John Malone's TCI last year ($48.3 billion) and in April for MediaOne ($58 billion). So with the locomotive going full tilt, the question on everyone's lips is,"Who's next?"

Look in scores of industry sectors, and the driving forces of M&A have not dissipated. Not only are new matches looming, but spin-offs of big deals of last year are serving up tasty morsels for other acquisition-minded institutions. Hence, Deutsche Bank's purchase of Bankers Trust has led to the divestiture of BT Australia, which has a coveted fund management arm, in a competitive bidding battle that is now under way. In oil and gas the megamergers of 1998 are forcing the remaining big companies to pull up to the dealmaking table. Consolidation is well under way in Internetbased companies. And deals are getting hot again in the emerging markets.Values in Latin America in the oil and electrical power sectors have never been better.

"All private sector utilities in Latin America are takeover candidates, says Rowe Michaels, managing director of Bear Stearns, but he also sounds a familiar warning that the longer acquirers wait, the more expensive it will be for them.

In fact, for acquiring companies now, every waking hour feels like decision time. Do you bid today at a price that will dilute your stock, or do you wait until tomorrow, when dilution will burden your shareholders even more? Bill Whyman, a principal at Legg Mason's Precursor Group in Washington and a specialist on Internet stocks, says:"It's expensive to buy, alright, but it sure isn't cheap to build" He's speaking of Internet portal companies, but he could be talking about other industries as well, including financial services, oil and gas, and power.

"A market like this prompts investment bankers to say to potential acquirers: `Buy now, or be left out!"' adds Mark Sirower, a specialist on M&A and a visiting professor at University of Pennsylvania's Wharton school.

The investment bankers' arguments would be mercenary if they weren't often true. Size and scale do matter in dozens of industries now at the peak of consolidations that have been going on for years. New, open markets have encouraged a new flurry of cross-border deals, and the convergence of technologies in such businesses as banking, Ecommerce, and telecommunications have made acquiring rather than building technologies the key to survival.

"With the economic barriers falling in Europe, scale has become particularly important," says Adam Schneider, co-head of financial institutions practice at Deloitte &Touche in NewYork. As for the likelihood of big deals in financial institutions coming down the pike, Schneider doesn't mince words. "We predict there will be merger activity worth $300 billion in the banking and securities industry in 1999 and, within the next 18 months, the first $100 billion financial services deal:' To put that in perspective, the Citicorp merger with Travelers, the biggest financial institution merger yet, was worth $72 billion.

It doesn't seem likely that our candidate for best takeover in the financial services industry-venerable J.P Morganwould be a partner in the match-up to which Schneider tantalizingly alludes. But there has been buzz about Morgan before, most recently when Deutsche Bank was shopping for a US financial institution last year. Morgan, which has $261 billion in assets, has fought hard with regulators since the 1980s to chip away at the Glass-Steagall Act that separates banking from securities in the United States, and it was among the first of the money center banks to begin acting as a securities house. But it has never been able to push itself solidly into the bulge bracket, and under CEO Sandy Warner the bank has seemed increasingly isolated.The match of Morgan Stanley and Dean Witter in late 1997 had the residual effect of putting J.P Morgan in the spotlight.Which route would the "Vatican of Wall Street" take to a merger? Rumors swirled that Merrill Lynch had mulled a bid for Morgan, and that Deutsche Bank was in talks with Warner. Morgan's 1997 purchase of a big stake in American Century, a mutual fund manager, in some ways took the pressure off the immediate need for a match. Says a banker with a rival institution who does not want to be identified:"Morgan is very interested in getting into the retail side of the business. It's 45% stake in American Century gives it an inroad, but American Century is no Charles Schwab."