Art of the Deal Meets Science of Market Drop [See bolded section]
nytimes.com
September 8, 1998
By LAURA M. HOLSON
EW YORK -- It's that time of year: The children are back in
school and Wall Street investment bankers have returned from
a lazy holiday weekend at their Hampton estates, now eager to do
deals.
But if the last two weeks are any guide, they may not see as much
action as they crave. As the lofty stock prices that buoyed the merger
wave this year have tumbled, many bankers are instead soothing the
frayed nerves of clients -- and worrying along with them about which
deals will fall apart.
"You really have to wait and see whether this is a fundamental shift in
the market psyche or just a temporary blip," said Steven Koch,
co-head of mergers and acquisitions at Credit Suisse First Boston.
Still, he warned, "I think it's more than a blip and could be a change in
the market mind-set."
That does not mean that all deal making will come to a screeching
halt. But consider the fortunes last week of a small
telecommunications company that was in discussions to be acquired
by a larger rival.
On Monday, hours after the Dow Jones industrial average dropped
512 points, the chief executive of the large company called his
counterpart at the smaller company to say that the talks were off until
stock prices settled. The smaller company's market value had slid in
the decline, the caller said, making the earlier negotiated price too
rich.
"We can't afford to pay a 110 percent premium," a banker close to
the negotiations quoted the executive as saying.
[Anyone care to speculate on the identity of the companies?]
Events like that are increasingly common. So much so that Mark
Menell, co-head of Morgan Stanley Dean Witter's West Coast
technology-mergers-and-acquisitions group, scrapped plans for a
pre-Labor Day holiday, staying behind to tend to the dozen or so
companies he is advising on potential transactions.
Every day last week, Menell made the 15-minute commute to
Morgan's offices in Menlo Park, Calif., well before sunrise, spending
hours counseling executives, even canceling dinner plans with friends
to make sure two deals did not falter at the last minute. "We want to
keep people focused on looking out the front window instead of the
rear-view mirror," he said.
Even so, some negotiations have been delayed, including a possible
merger involving a company that wants to wait until its intended
partner announces earnings for the current quarter.
[Any guesses?]
Behind much of the turmoil is uncertainty over the short-term effect
that unstable world markets will have on domestic companies. That,
coupled with fluctuating stock prices in the United States, makes
pricing deals a treacherous exercise.
"It's still business as usual," said Peter Crnkovich, a health-care
banker at Morgan Stanley who spent most of last week on the road
visiting clients. "But people aren't comfortable with what things are
worth right now."
It is not just potential clients who need hand-holding, however. Hal
Ritch, co-head of mergers and acquisitions at Donaldson, Lufkin &
Jenrette, spent Friday morning mulling over an international deal that
has been plagued by currency fluctuations -- a problem that is not
addressed in the merger agreement.
And that is only one deal on his mind. For days, teams of bankers
have stacked up outside his office waiting to discuss any of the more
than six deals in his shop affected by the market turmoil. The
persistent bull market lulled company executives and their advisers
into omitting terms that would have let them walk away in the event of
a sharp downturn.
"After a long period of stability, people get a little comfortable, " he
said. "But these breaks in the market, when they occur, have
real-world consequences."
One banker who asked not to be identified recalled a recent
conversation with the treasurer of a Fortune 500 company whose
merger has not been approved by shareholders.
At first, the two bantered about all the money to be made in
corporate takeovers. (In fact, many arbitragers are smarting from
losses they incurred after the merger agreement between Tellabs Inc.
and Ciena Corp. was renegotiated in August. And the market is rife
with rumors about which deals -- particularly in the financial-services
sector -- are next.)
But when the conversation turned to his own company, the treasurer
was less sanguine, worrying that eroding investor confidence could
tarnish otherwise promising deals like his.
He may have reason to fret. "Things dried up for four months after the
crash of 1987," recalled Allen Finkelson, an attorney at Cravath,
Swaine & Moore. And last November -- after the stock market's
biggest point drop ever on Oct. 27 -- the total value of announced
domestic deals sank to $69 billion from $184 billion the previous
month, according to Securities Data Co.
"It has to be part psychological," said Steven Kaplan, a professor of
finance at the University of Chicago. "Let's say your company was
trading at $120. Now you are at $100, and someone offers you
$120. You think: 'No way. I was just worth that much."'
For all the uncertainty pervading big corporations and their bankers
and investors these days, some corners of Wall Street are heartened
by the stock market's swoon.
For Michael Klein, head of the financial entrepreneurs group at
Salomon Smith Barney, this is an opportunity his clients have been
waiting for. He caters to leveraged-buyout firms that found few
domestic bargains the last few years and now have almost $100
billion on hand to snap up companies at reduced prices.
In the last 10 days, Klein has marshaled 20 bankers who have
compiled a list of recently delayed initial public offerings and
capital-needy companies, including a $500 million public company [Any guesses?] he
has already introduced to possible buyers.
Klein, like Menell, was supposed to be on vacation last week.
Instead, he found himself busily rushing off to impromptu meetings
with financiers who live near his family's rented Long Island summer
home overlooking Shinnecock Bay. On Wednesday, for instance, he
said he spent the afternoon discussing ideas at the Southampton home
of the financier Leon Black of Apollo Management, whose house is
visible across the bay from Klein's back yard.
"Are we exuberant? Not quite," Klein said when asked in a lunchtime
interview on the sundeck of his cottage last Thursday how he felt
about business prospects. Looking almost boyish in blue-and-green
checkered shorts and Birkenstock sandals, Klein casually flipped
through a 61-page document of businesses for sale. "But am I
happy?" he said. "Yes."
It may be some time, though, before he sees the payoff. For one
thing, the high-yield corporate bond market is moribund. And just
because a buyout firm wants to buy, that does not mean a target
company wants to sell. But if stock prices sink further, investors like
Black could reap rewards next year.
Conventional wisdom has it, too, that bankers could be defending
more companies against unwelcome advances than they have in
recent years.
"Companies that were forced to approach another on a friendly basis
are more likely to consider hostile bids now," said Peter Schoenfeld,
head of the equity investment firm PSAM LLC. In addition, he said,
"we are likely to see more of a willingness to use cash instead of
stock." If so, that could dampen Wall Street's flirtation with
megamergers, simply because few companies can afford $50 billion
all-cash offers.
Still, any break in activity, while not welcome by Wall Street, may
give bankers a much-needed breather to take care of things they had
put off for months. Gregg Polle, co-head of mergers and acquisitions
at Salomon Smith Barney, for instance, finally served his turn on jury
duty last week after many postponements. "I picked this week
because I thought activity would be slow," he said. "But I never
hoped for this."
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