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Friday, November 27, 1998 Published at 17:02 GMT


Business: The Company File

Why merger fever is back

The recovery of the stock market has fuelled mergers

1998 has already turned out to be the year of the merger.

More mergers were announced over the last week than in the whole of the last year, culminating in the tie-up between Deutsche Bank and Bankers Trust to form the world's largest bank with $800bn in assets.

And its not over yet. Oil giants Exxon and Mobil are expected to announce another mega-merger soon.

But what has been driving the tie-ups?


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The key sectors that have been affected - oil and gas, financial services, telecoms, and cars - are all suffering from over-capacity and pressure on costs.

At the same time, the surge of share prices on the stock markets has made it easier to buy companies by paying with stock.

The collapse of the market during the summer dampened the fervour for a while, but as share prices have recovered during the past weeks merger mania has re-emerged.

Oil price pressure

The oil industry has been a prime target for mergers, after it was hit hard by the fall in oil prices.

This year there has been a glut of oil on the market, caused by increases in production by developing countries and a collapse in demand in Asia.

As a result, oil prices have fallen from around $18 a barrel to around $11.

That has put enormous pressure on costs, and on realising economies of scale.

The oil industry is highly capital intensive, requiring huge investments that can take years to come to fruition - if they ever do.

Oil refineries are now ten times the size they were in the 1970s, and environmental standards make them far more expensive.

By merging, and taking out excess capacity and prices, oil companies can still make a profit.

Even Shell, the world's biggest oil company, has begun a massive restructuring programme with huge job losses.

But as oil prices fall, restructuring within one company has not been enough.

Companies as large as BP and Exxon have been forced to contemplate mergers to make greater savings.

And in the process, the "Seven Sisters" who have dominated the oil industry for decades (Exxon, Shell, Texaco, Mobil, Chevron, Gulf, and BP) could become just three brides - with one or two Cinderella companies left out.

Another major industry with over-capacity and high capital costs is the automobile industry. The Daimler-Chrysler merger is unlikely to be the last in the industry, as the dozen or so volume car producers worldwide could merge to become only five or six.

Regulatory changes

Changes in government regulation have also been a potent force in promoting mergers.

The emergence of the single currency, and the relaxation of controls on banking in the US, have led to a wave of mergers in that sector.

The deregulation of global capital markets has made it more desirable to create banks with a global reach.

Following Deutsche Bank's acquistion of Bankers Trust, most of the major European banks have now signalled their intention to find a major international partner.

Telecoms

The on-going liberalisation of the telecoms market, both in the USA and Europe, has led to the search for global telecoms alliances.

And the heavy investment needed in new technology, for example fibre-optic cables, has encouraged companies like AT&T and TCI to come together.

Troubled mergers

But two highly regulated sectors have had more difficulty to produce successful mergers.

The airline industry is consolidating, but delays in regulatory approval have blocked the biggest deal, the BA-AA deal.

And the pharmaceutical industry's drive for global consolidation has run into difficulties as two of the biggest mergers - SmithKline Beecham-Glaxo and Monsanto-AHP - were called off after neither side could agree on who would run the merged company.

But more recently, the German chemicals company Hoescht and the French firm Rhone Poulenc have announced that they will merge their life sciences businesses.

Stock surge

The surge in the stock market has made it easier for acquistions to proceed.

Companies can buy their rivals using their own stock, avoiding the need to raise cash which might have to be borrowed at high interest rates.

The phenomonal increase in share prices in the past few years has fuelled the merger boom.

Banking stocks were particularly strong perfomers earlier in the year, making takeovers more attractive.

The collapse in their shares prices over the summer, and indeed the sharp drop in the market overall, cooled the ardour for mergers.

But with the market back near a record high, a new wave of takeover bids was probably inevitable.





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