This article was originally published in Maclean's Magazine on August 14, 1995
Disney Buys ABC in Merger Mania
Uncertainty is stalking the North American economy and mixed messages abound: a recent study from the Conference Board of Canada indicates that corporate confidence ebbed to a 15-month low in June, weighed down by concerns about volatile interest rates, uneven economic growth and weak consumer demand. Nevertheless, companies in Canada and the United States are roaring forward with the largest volume of mergers in corporate history. Last week, Walt Disney Co. topped an already-impressive list of deals when it expanded the realm of its Magic Kingdom with the $25.8-billion acquisition of Capital Cities/ABC Inc. And according to corporate financiers, the action is just starting. "We are nowhere near the top of the market yet," says Gerald Schwartz, chairman and chief executive of Toronto-based Onex Corp., which has made two major U.S. acquisitions this year - as well as a thwarted $2.3-billion bid for Canadian brewer John Labatt Ltd. "There's a lot more strategic positioning to be done and there's lots of support to do it."
Indeed, at the same time as Disney dazzled the investment community with its acquisition, there was a flurry of other transactions in a wide variety of sectors. Westinghouse Electric Corp. announced a $7.3-billion takeover offer for CBS Inc.; Moore Corp. Ltd. of Toronto announced a $1.8-billion bid for Wallace Computer Services Inc. of Hillside, Ill.; space technology company Orbital Sciences Corp. of Dulles, Va., offered $87 million for MacDonald, Dettwiler and Associates Ltd. of Richmond, B.C.; and Sprint Canada Inc. acquired the assets of rival long-distance telephone company Smart Talk Network Inc. for $19 million. "Everyone has been hunkered down for the last five years," noted Phillip Doherty, president and chief executive officer at Canadian General Capital Ltd., a firm that backs mergers and acquisitions on behalf of two major Canadian pension funds. "Now, they're starting to come out of their shells."
Even organized labor is getting into the act: the United Steelworkers of America, the United Auto Workers and the International Association of Machinists recently announced their plans to join forces and consolidate. And last week, Seagram Co. Ltd. of Montreal, which spent $7.8 billion in June to acquire 80 per cent of MCA Inc., appointed a Wall Street mergers and acquisitions specialist, Robert Matschullat, as the company's vice-chairman and chief financial officer. According to data collected by Crosbie & Company Inc., a Toronto-based merchant bank, the dollar value of mergers and acquisitions in Canada in the first half of 1995 soared to $43.3 billion. That compares with $48.4 billion, the record-breaking total for all of 1994. In the United States in the first half of this year, the value of deals climbed to about $223.6 billion, up 20 per cent from a year ago.
Despite the frenzied pace of activity, however, observers insist that this round of corporate shuffling bears few similarities to the frantic conglomerate deals of the late 1980s. First, companies are applying more rigorous strategic tests to all transactions. That means that they are teaming up with companies in related businesses and attempting to enhance their competitive advantage in the international business arena. Second, the financing arrangements are more conservative, with a smaller component of debt and leverage.
Although there is an ongoing debate about whether acquisitions are the most efficient way for companies to expand their operations in the long term, Doherty notes: "To compete globally, companies have to build critical mass quickly. And there's no question that it's fastest to buy what you need." The international element in recent deals is also reflected in the number of cross-border transactions: In the first half of the year, Canadian companies completed $22.7 billion in foreign mergers and acquisitions, up from just $3.9 billion in the same period a year ago.
The push to enter foreign markets has also spurred North American companies to seek local acquisitions or alliances to help them gain market share and credibility in unfamiliar territory. "The global game has huge, potentially lethal risks attached," says Lindsay Meredith, director of the MBA program at Simon Fraser University in Burnaby, B.C. "To hedge that risk, companies are willing to pay a premium for regional expertise."
Another significant development related to the heightened emphasis on global competitiveness is the demand for so-called intangible assets, such as market share, technological expertise or established brand names. "Establishing your name and reputation in a foreign market can be hugely expensive," notes Meredith. "It can be much cheaper to buy what you need."
Certainly at this point in the economic cycle, most North American companies appear to be well positioned to finance their ambitious expansion plans. Interest rates are at a relatively low level - last week's prime interest rate of 8.25 per cent compares with 13.5 per cent in August, 1989, when the last round of mergers and acquisitions was at its peak - corporate earnings are in full recovery and equity markets are thriving. Furthermore, chartered banks are looking for high returns on their bulging capital bases and they are loaning money to corporations again. Where banks are reluctant to tread, a growing number of Canadian pension funds are eager to fill the breach. In an effort to bolster the return on their billions of dollars in accumulated capital, pension fund managers are aggressively investing in real estate, private placements of debt and equity and takeovers. The Ontario Teachers' Pension Fund, for one, backed Schwartz's bid for Labatt, as well as Wallace McCain's acquisition of Maple Leaf Foods and Steve Stavros's play for Maple Leaf Gardens.
Most significant, there is also a pronounced psychological factor at work in the most recent spate of deals. Despite economic uncertainty, the prevailing mood is optimistic. "People have turned a corner in their minds and they've seen enough improvement to take a well-considered leap," says Schwartz. Adds Doherty: "If you are a CEO, you want to make your mark on a company - splashy growth is equated with creating value." And above all, at a time of rapid change and global markets, there is also safety in size.
Maclean's August 14, 1995