Starting a Cautious Revival

One of the most popular paths to corporate growth during the surging '60s was acquisition of other companies. The more firms an aggressive company gobbled up, the more investors it attracted and the higher the price of its stock soared. Ambitious company chiefs issued securities of inflated value to buy up wildly diverse businesses and paste them together into massive conglomerates. But many of these structures fell apart because of the collapse of stock prices in 1969 and the bouts of wild inflation and deep recession that marred the early 1970s. From almost 4,000 in 1969, the number of acquisitions fell to little more than 1,000 last year, according to figures compiled by Niederhoffer, Cross & Zeckhauser Inc., a New York firm that specializes in arranging acquisitions. Recalls Chairman Victor Niederhoffer: "People thought there was something wrong with a company if it acquired something."

Now, though, a rapidly recovering economy, a rebounding stock market and soaring corporate profits (see following story) are reviving the urge to merge. So far this year, corporate marriages have been running more than 30% ahead of the 1975 pace. In April alone, there were 123 corporate acquisitions; that was far below the peak of 430 in July 1969 but 32% ahead of the 1975 month and the highest number since January 1974. Acquisitions by well-known companies in recent months include Pillsbury Co.'s purchase of the 113 Steak & Ale restaurants; W.R. Grace's acquisition of Sheplers Inc., a clothing store; Colgate Palmolive's buy-out of Charles A. Eaton Co., a golf-and tennis-shoe producer; and H.J. Heinz Co.'s takeover of Melloday Lane Foods Corp.

The new mating game is being speeded by declining interest rates on borrowings, banks' willingness to make buy-out loans again as money becomes more plentiful and a general reduction in corporate debt that puts many firms in a stronger position to expand. In addition, foreigners, worried about the political and economic uncertainties in Europe and elsewhere, are shopping in greater numbers to buy up or into American companies. For example, a U.S. crane producer, Time Manufacturing, recently sold out to an Irish auto distributor, and a Swiss pharmaceutical corporation is now dickering to buy an American food firm.

Another factor in the resurgence of mergers is the growing willingness to sell out of small, privately owned firms with sales of $10 million or less. According to Niederhoffer, the owners of these businesses are still unable to attract enough investor interest to sell their shares publicly and raise capital to grow. At the same time, they fear that increased Government regulation of business is inevitable.

One intriguing aspect of the pickup in mergers and acquisitions is that black businessmen for the first time are playing a role. Until recently, many black entrepreneurs who could raise money had little experience and were forced to start their businesses from scratch in ghetto areas. As a result, the mortality rate of black-owned businesses has been high. Now, led by Manhattan's Citibank, moneymen are seeking out black entrepreneurs who have good management records and offering to finance their acquisition of successful, largely white-owned enterprises. Citibank recently helped blacks to take over a profitable Chicago margarine company.

But merger-minded businessmen today are far more cautious than their freewheeling counterparts of the 1960s. Many buy-outs now are for cash; too many owners who sold businesses in the '60s lost money when the price of the securities they took in return plummeted. Some owners will still accept common stocks of the buying company, but they resolutely reject any of the more complex arrangements involving new issues of preferred stock, convertible debentures, warrants or the like. Prices, too, tend to be conservative. Six or seven years ago, companies were often sold for three or even four times their book value (the stated value of assets minus liabilities). Today, many fetch only 10% or 15% above book. Companies now are also concerned about the "fit" of the acquisition. Managers want the product line of the firm they acquire to mesh with their own company's products or at least fit logically into their marketing and management setups. That is a far cry from the 1960s, when any company in any field that seemed potentially profitable was fair game for the conglomerates.

Unhappy memories of the last merger craze will probably continue to impose some restraints on acquisition-minded companies, at least for a while. But the acid test of how well the lesson has been learned will have to wait until the economy is fully recovered and the yearning for quick corporate growth is once again abroad in the land.

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