New Round of Layoffs on the Horizon as Merger Activity Heats Up (Nov. 24, 2003)
Although mass layoffs declined in the third quarter of 2003, a new wave of layoffs is gathering on the horizon as merger and acquisition activity gains strength.
After a decisive three-year lull, signs are amassing that mergers and acquisitions may come roaring back in 2004. Early indications include a rash of megadeals toward the end of 2003 in industries ripe for consolidation.
By mid-November, the value of mergers and acquisitions announced in 2003 by U.S. companies reached $447.1 billion, up from the $415.8 billion announced during the same period for 2002. Although this year’s M&A activity is still just a fraction of the $1.4 trillion record set in 1999, the upswing is a significant reversal of years of steady decline.
The merger binge of the late 1990s came to an abrupt halt as the recession hit, stock prices fell and corporate scandals rippled through whole industries. With share prices dropping, few companies were in a position to forge the equity-based deals that fueled M&As in the 1990s.
Stock prices are now up 35 percent from their October 2002 low and companies are prepared to move forward with deal-making. A handful of large mergers announced toward the end of 2003 indicate that U.S. activity may be poised for an upturn. The new round of mergers and acquisitions, however, will be quite different from the M&A binge of the late 1990s.
At that time, stock prices were high and shareholders were complacent. Stock-based M&A deals multiplied with the focus squarely on market share and growth, and less concern for cost implications. According to Challenger, Gray & Christmas, Inc., the merger boom of 1995-1999 translated into a 12 percent increase in layoffs during that period.
The impact of the increase was relatively subdued because companies were not heavily focused on cutting costs and many of the workers who were displaced were quickly absorbed into other jobs in the rapidly expanding economy.
The returns from the last rash of M&As were disappointing, however, and investors have set the bar much higher for M&As going forward. Under pressure from shareholders and Wall Street, the new round of mergers and acquisitions will be marked by close scrutiny of costs and immediate post-merger workforce reductions.
Many of the mergers and acquisitions will focus on distressed industries where prices have hit bottom and predator companies feel sufficiently secure in the economic recovery to move forward with deals. In the distressed industries, mergers and acquisitions will trigger imminent, massive layoffs.
R.J. Reynolds announcement of its purchase of the U.S. units of British American Tobacco triggered immediate plant closings. The downturn in the music industry inspired Sony Corp.’s recent announcement that it will merge with Bertelsmann AG; layoffs will occur in both companies.
Mergers and acquisitions are also accelerating in the distressed high tech sector, with savings expected to come from substantial layoffs. Merger talks are also underway among a number of companies in the telecom industry where overcapacity is high and substantial post-merger layoffs are likely.
High levels of M&A activity are also possible in niche industries where market share and economies of scale have become increasingly important.
The finance sector is leading the M&A revival. The October 2003 announcement of Bank of America’s purchase of FleetBoston for $47 billion will generate a new round of bank mergers among regional banks attempting to gain the geographic reach created by the Bank of America/FleetBoston deal.
In addition to the banking industry, the beverage and apparel industries also reported an increase in 2003 M&A activity. Other industries with higher M&A activity in 2003 included food processing, broadcasting, automotive products and mining and minerals.
The insurance and health care sectors will also see increased strategic consolidation. A total of 78 insurance deals, valued at $14 billion, were announced in the third quarter of 2003, a decisive increase over the 48 deals valued at $823 million announced in the third quarter of 2002.
The significant increase in U.S. health care M&As in the third quarter of 2003, largely driven by hospital M&As, is likely to continue in the hospital sector as well as in the biotechnology, medical devices and pharmaceuticals industries.
New mergers and acquisitions may hit the industries where recent job growth has been greatest. In the finance sector, for example, the mortgage industry added 150,000 jobs during this year’s refinancing boom, but may shed 100,000 of those in the first half of 2004 as the boom fades and mergers consolidate companies in a declining mortgage market.
laborresearch.org |
