Market Gyrations May Put A Damper On Stock-Swap Merger Activity
By Eric Weiner Staff Reporter
NEW YORK -(Dow Jones)- With the U.S. stock market gyrating, mergers-and-acquisitions specialists expect to adopt a "cash is king" motto for their upcoming deals.
"All this movement will make it much more difficult to do stock deals, at least temporarily," said Stephen Willard, executive vice president and general counsel of Fuisz Technologies Ltd. (FUSE) and a former M&A attorney at Gibson Dunn & Crutcher in Washington.
Willard said he soon will be heading to Europe to work on two ongoing takeovers for Fuisz, an acquisitive drug company based in Chantilly, Va. When he gets there, he expects to pull the existing offers - which had been a mixture of cash and stock - and just put cash bids on the table.
"I'll initiate (the all-cash offers) because I'm very certain that the buyers will be much more insecure about taking stock than they had been," he said. "Stock was king, but now increasingly cash will be king."
In general, few M&A experts expect the market's fluctuations to have any long-lasting effect on the number of deals being contemplated this year.
They point out that unlike the 1980s M&A explosion, the latest takeover boom for the most part is being driven by economic concerns, not bargain shopping or conglomerate building. In essence, the companies that are acquiring today are doing so for strategic reasons - such as potential cost reductions or the elimination of competition - and those conditions haven't changed despite the stock market's movement.
"I find all of the volatility to be interesting but fundamentally sort of irrelevant to the M&A market," said Steven Koch, co-head of M&A at Credit Suisse First Boston. "I don't believe that anybody who's out there thinking about a major strategic move involving buying or selling assets is rethinking his strategy."
M&A activity in the U.S. largely is driven by the country's overall economic condition. When the economy is strong, companies are eager to expand their operations, but when the economy starts to slide executives tend to be more cautious.
Koch said the current healthy economic conditions in the U.S. bolster his point that there has been no change in the fundamental M&A climate since the stock market started tanking late last week.
For instance, on Monday the federal government revealed that the fiscal 1997 deficit is just $22.6 billion, its lowest level since 1974, and accountants at the Treasury Department can't fully explain why the deficit came in so much lower than they had expected.
"We're worried about why the deficit is so small," Koch said, laughing. "When was the last time that happened?"
Of course, the healthy U.S. economic conditions won't eliminate the impact of the stock market's movement on U.S. mergers and acquisitions.
For the most part, experts believe all-stock deals, which have been the rage during the bull market's stirring ascent, will fall out of vogue, and be replaced as the method du jour by either all cash and debt deals, or combinations of cash, debt and stock.
"We might see a change in the means of payment, with many acquirers moving to emphasize cash or debt," said Samuel Hayes, a professor at Harvard Business School.
That would mean increasing work for bond underwriters at securities firms and loan officers at banks who would be putting together the complex debt packages used to finance the takeovers.
And, this could present an opportunity to financial buyers, such as leveraged buyout funds, who can't use stock as a currency, but have access to large amounts of cash.
"There is plenty of liquidity among the financial buyers to step up their activity," said Peter Lombard, head of mergers and acquisitions at BancBoston Securities Inc. "This to a certain extent may play into their hands."
Just last week, when the stock market was still soaring before the Hong Kong currency crisis erupted, there were legitimate debates in the M&A community over whether cash or stock deals were more attractive.
Fuisz's Willard said he worked on a recent takeover while he was still at Gibson Dunn & Crutcher in which an Italian target accepted a suitor's stock at about 1 1/2 times its market value, obviously assuming that the stock price would rise well beyond that in the coming months. But, the days of those deals are over now, he said.
"After the scare that's gone on we won't see that kind of deal for another six or seven years," Willard said.
Still, some observers said that stock-for-stock deals won't be eliminated because the market's fall has been so broad-based that almost every major firm's stock price has taken a hit.
They believe that if the value everybody's shares has fallen, and the market stabilizes, there isn't any reason why the same conditions that were in place last week wouldn't be valid today.
"In most cases, the target's stock price has gone down in tandem with the suitors', so the deal therefore should still work," said Morton Pierce, an M&A partner at the New York lawfirm Dewey Ballantine. "If it was a good deal last week then it's still a good deal today."
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Transmitted: 10/28/97 15:40 (L100ZTLF) |
