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Tuesday, January 12, 1999 Published at 18:10 GMT


Business: The Company File

Merger fever steps up a gear

The recovery of the stock market has fuelled mergers

The first weeks of 1999 have seen merger and takeover action dominating the corporate landscape with analysts predicting the number of tie-ups this year could dwarf 1998's numbers.

In 1998 a record 2,278 merger deals worth £90bn were approved in the UK, according to new figures from Acquisitions Monthly.

The global figure for merger activity also broke all records, with $2.4 trillion (£1.45 trillion) worth of deals worldwide.

Cost savings

But what has been driving these deals?

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

Jeremy Batstone of NatWest stockbrokers, said:

"In a low-inflation environment companies are finding it impossible to put through price rises. They are being forced to look to mergers and deals in order to make savings."

At the same time, the surge of share prices on the stock markets has made it easier firms to buy rival companies by paying with shares in their own company.

But older observers add that the current burst of activity also signals a return of a cyclical fashion. In the early 1990s, they say, smaller businesses were the order of the day as companies sold off side assets to focus on their 'core businesses'.

But now, for a while at least, the 'big is beautiful' approach rules again.

Oil pressure rising

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

Already BP and Amoco and then Exxon and Mobil have teamed up in two of the biggest mergers in industrial history.


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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 $10.

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 into 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.

Car wars

Another major industry with over-capacity and high capital costs is the automobile industry. The Daimler-Chrysler merger has been followed by a catalogue of rumours about talks among other car makers.

Volvo and Fiat have confirmed they are in talks and speculation about compnaies such as Ford, BMW and Honda just won't go away. Industry analysts say the dozen or so big-volume car producers worldwide could merge to become only five or six.

Regulatory changes

Freer markets 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.

The tie-up between Deutsche Bank and Bankers Trust formed the world's largest bank with $800bn in assets.

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.

As well, the exponential growth in mobile phone and Internet usage has seen companies desperate to grab expanding market share. The escalating battle between Vodafone, MCI WorldCom and Bell Atlantic for US mobile phone operator AirTouch to create $50bn-plus giant is symptomatic of this.

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.





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