Come Together, Right Now

By John Greenwald

Greed! Aggression! Corporate Intrigue! Betrayal! That's what you get when, say, a home-shopping channel wants to merge with a television network, right? Yet the juicy story line that usually comes with takeovers among media moguls is showing up in all corners of American industry these days. In fact, while the buzz is with Ted (Turner) and Larry (Tisch), the guys who are throwing real money around in their bids to consolidate belong to such unglitzy businesses as railroads and banks. Now it can be said: the '90s were never meant to be the decade of small appetites.

Just last week, American Home Products, a sprawling outfit whose wares range from Anacin to Chef Boyardee spaghetti and meatballs, launched an $8.5 billion hostile bid for pharmaceutical maker American Cyanamid. At $95 a share, the offer was fully $32 a share more than Cyanamid's recent trading price, which made its shareholders the envy of Wall Street. Moreover, the staggering bid arrived while investors were still humming with reports that the Norfolk Southern railroad was in talks to acquire Conrail, once a sickly ward of the government but now a healthy freight hauler, in a deal that would create the second largest U.S. rail carrier.

The prospect of such industrial-strength combinations was only part of the merger action. In Washington the House overwhelmingly agreed to let banks open branches across state lines and sent the bill on to the Senate, where it is expected to pass within the next two weeks. The House vote overjoyed giants such as Citicorp and BankAmerica, which would finally be free to gobble up banks across the country.

The pace of takeovers today already rivals the most frantic years of the '80s. So far in 1994, companies have announced deals worth $171.6 billion, nearly 50% more than those of a year ago. At that rate, 1994 would trail only 1989 as the most merger-filled period on record. "The deals have just begun," declares Martin Sikora, editor of the trade journal Mergers & Acquisitions. "The story of entire industries is being rewritten."

The corporate marriages range across the breadth and depth of American business, from banking to pharmaceuticals to telecommunications. Defense? Try Northrop's $2.1 billion buyout in April of aircraft maker Grumman, which had also been sought by Martin Marietta. Retailing? Federated paid $4.1 billion for R.H. Macy last month in a merger that created America's largest department-store company. Wireless phones? U.S. West and AirTouch Communications agreed two weeks ago to pool their cellular operations into a business with total sales of $13.5 billion and nearly 2 million subscribers.

The action is hardly confined to corporate behemoths. Merger mania has been raging just as strongly among smaller firms such as management consultants, environmental engineers and even funeral homes. The dealmaking is particularly feverish among medium-size makers of components like auto parts. "Throughout all of U.S. industry, and particularly in the automotive sector, the trend is clearly toward reducing the number of suppliers you want to do business with," says Robert Eaton, Chrysler's chairman and CEO. So suppliers are rushing to team up with one another and thus increase their chances of remaining in business.

How might all these deals affect American workers and consumers? As in the 1980s, economists and management gurus love to debate the benefits (higher profits?) and drawbacks (higher prices?) of corporate mergers. One thing, however, is virtually certain: the consolidations will create new waves of layoffs as the merged companies get rid of overlapping jobs and slash costs to make the deals pay off. The rapidly merging pharmaceutical industry eliminated more than 31,000 jobs, or 12% of its work force, between October 1992 and last April. In the field of defense, Grumman was planning to phase out 2,000 jobs, or roughly 3% of its work force, even before it was acquired by Northrop. No sooner had the deal been struck than industry experts predicted Grumman would wind up cutting at least 4,000 workers. Northrop too is reducing its payroll; the company has said it will eliminate 3,000 jobs at its plants and offices.

The rush of mergers has caught the Clinton White House without a clear antitrust policy. While Clinton has pledged to reinvigorate enforcement of antitrust laws, which loosened during the Bush and Reagan Administrations, the President seemed taken aback at his news conference last week when asked whether he would move to halt the consolidations. The Administration is clearly of two minds on such issues. Assistant Attorney General Anne Bingaman talks tough about enforcing the statutes. But while she worries about industries becoming too concentrated, chief economic adviser Laura D'Andrea Tyson argues that U.S. corporations should be permitted to bulk up to meet foreign competition.

In fact, companies have a wide range of reasons for joining forces. Some companies are merging because they see the coming shape of their industry, while others are hedging bets against an uncertain future. "You've got people in very diverse industries doing deals," says investment banker Herbert Allen Jr. "I don't think the telephone deals are influenced by the drug-industry deals. I don't think the drug deals are influenced by the cable deals. It's just one of those things that happen." A look at where today's mergers are hottest:

PHARMACEUTICALS. Prescription-drug makers were among the most profitable companies in America during the 1980s, when few doctors or patients ever questioned the price of a pill. But at a time when health-maintenance organizations and insurers are scrutinizing every outlay and the White House wants to overhaul the entire health-care system, drug companies are scrambling to merge with their rivals to push costs down and drive profits back up.

American Home Products is only the latest company to join this trend. Earlier this year Roche agreed to pay $5 billion to acquire Syntex, whose products include the popular arthritis drugs Naprosyn and Anaprox, and Sanofi of France is spending $1.6 billion to buy the prescription-drug unit of Sterling Winthrop, a subsidiary of Eastman Kodak.

The big news has been the rush by drug manufacturers to acquire large distribution networks that keep medicine prices down by buying in bulk. Last month Eli Lilly agreed to pay $4 billion for McKesson's PCS Health Systems, which provides drugs at deeply discounted prices to HMOS and insurance plans. The move followed Merck's 1993 acquisition of Medco, another national outlet. Such mergers worry some health-care experts. "Why would hospitals now want to deal with Medco?" asks Alan Shapiro, a finance professor at the University of Southern California business school. "Hospitals and HMOS dealt with it in the past because it was independent and they were really putting the screws on all the pharmaceutical companies. But Medco is no longer going to be a disinterested intermediary."

TELECOMMUNICATIONS. Even as telephone and cable-TV companies join forces to wire up America, cellular firms are racing to create networks in the air. Last week Nextel Communications, a New Jersey wireless company, gained just such a coast-to-coast system when it acquired the cellular operations of Dial Page of South Carolina plus the mobile-radio business of Motorola in deals valued at $2.7 billion. The combinations will pit Nextel, a firm with 200,000 customers, against AT&T, which agreed to pay $12.6 billion for McCaw Cellular last year. Also in the fray are Nynex and Bell Atlantic, which agreed in June to combine their cellular units.

RAILROADS. The U.S. had some 30 large railroads during the 1960s, but today the number has dwindled to a dozen. It is likely to shrink further if Conrail and Norfolk Southern go ahead with a deal and Burlington Northern completes its $2.4 billion acquisition of Santa Fe Pacific. That deal, announced last month, would create the largest U.S. railroad. The force behind such consolidations is the growing strength of a railroad industry that for years watched truckers drive off with its business. The railroads have cut their payrolls nearly one-quarter since 1987, which helped lower costs and reduce freight charges. The resulting surge in business has boosted their profits. "These mergers are the railroads' way of saying that the enemy is not really one another," says James Higgins, who watches the industry for Brown Brothers Harriman. "The enemy is the highway and the truckers."

Merging is one thing; making the deal a success is quite another. Some combinations, like last year's proposed merger of Bell Atlantic and TCI, never make it to the altar. Says Margaret Blair, a Brookings Institution economist: "The difference between the winners and losers is one heck of a lot of luck." And that's often true even if the people involved in megamergers use lofty concepts like "synergy" and "vision" to justify their moves.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Jason Lee

[TMFONT 1 d #666666 d {Source: Securities Data Co.}]CAPTION: MEGAMERGERS

TOP MERGER INDUSTRIES IN 1994

With reporting by Bernard Baumohl, John Moody and Jane Van Tassel/New York and William McWhirter/Chicago