THE current wave of mergers and acquisitions is just the beginning of a major period of corporate consolidation, says Dennis J. Block, co-chairman of M.&A. for the New York law firm Cadwalader, Wickersham & Taft, who has played a role in many mergers. Here are excerpts from a recent conversation:
Q. We’re seeing proposed mergers like Procter & Gamble’s plan to acquire Gillette and Federated’s plan to buy May Department Stores, as well as proposed deals involving AT&T and MCI. But companies like Citigroup and American Express are spinning off certain assets. What’s going on?
A. It’s a period of consolidation. Even in such a period, the concept is to find a way to enhance your core business. Spinoffs are usually a good method of carving out pieces of the business that don’t fit the description of “core.”
The real increase started in December. It’s somewhat of a reaction to the certainty created by the election.
Q. Until recently, it seemed that mergers were out of fashion, on the assumption that they did not reward shareholders and were difficult to manage, as we saw with Hewlett-Packard and Compaq Computer.
A. Your assumptions are applicable to some transactions, but not all. Some have created value. Some have enhanced businesses that needed to have more critical mass. There is a great need for consolidation today because of the business environment. You’re dealing in a global market. There’s tremendous competition. Profit margins are being squeezed. To reach double-digit growth, which is the goal of most companies, they’re looking for additional products and additional critical mass.
Q. Why don’t companies spend all this money on internal innovation?
A. That’s more expensive. You have great uncertainty when you do it internally. If you can buy something that has a track record, you start out that much farther ahead in the game. If you can buy a brand and take advantage of the synergies, that’s easier. Most of the transactions you’re seeing are “in market.” They are building on their own core business, as opposed to bringing in some business they’re not familiar with.
Q. Hasn’t the term “synergies” been discredited?
A. Synergy obviously depends on having two items that are synergistic, that work hand in glove. If you look at a merger of two banks, it’s hard for me to see why you’re not going to create enormous synergies. You’re going to be able to remove one set of overhead from management. You close some branch offices that are unnecessary. It’s a question of what you’re putting together. If you’re putting crayons and marbles together, you probably don’t have much synergy.
Q. What industries are going to be transformed?
A. Retail is very active. Telecommunications is extraordinarily active. Media is an area that’s going to be active in the upcoming year. Energy is going to be active. Real estate ought to be active. We’re going to see action in fields where there already has been some consolidation. You have a catching-up effect.
Q. What would you expect to see in manufacturing?
A. Look at pharmaceuticals. It takes 14 years to create a new drug. You’ll see a consolidation. Food products are another good area where you’ll see consolidation.
Q. How far will mergers go in retailing?
A. When you think of retailing, who do you think of? Wal-Mart. If you’re competing with them, you need to have a certain size so that you have comparable buying capability. Winn-Dixie apparently attributes its bankruptcy to its inability to compete with Wal-Mart. You’re going to see consolidations among supermarkets to enable them to compete.
Q. What is happening in media?
A. There’s been lots of consolidation over the past 10 years. You’re going to see more of it. It’s a business that’s capital-intensive. There’s lots of competition. You’re going to see fewer, bigger participants. I read that somebody thought Cablevision was prettying itself up for a transaction. That wouldn’t shock me. Cable is a unique industry. There is only a finite number of subscribers. It’s very hard for a business to grow internally because you’re limited by geography and how many subscribers you have in that location.
Q. How does this wave of consolidation compare with previous periods?
A. In the last wave of the 90’s, we saw mostly synergistic transactions. This will be comparable. But you won’t see these huge “mergers of equals” because those have been discredited.
Q. Are you referring primarily to Hewlett-Packard and Compaq and DaimlerChrysler?
A. I don’t want to use examples, but you’ve picked two good ones. The idea of having two executives at the top doesn’t work real well.
Q. Does this wave of consolidation raise anticompetitive issues?
A. The regulators are aware that there is a need to consolidate. Almost everything today is a commodity. To compete in a commodity world, you need bulk. This is a world economy. There is a lot of competition. When you look at consolidation, you really have to look at the world market. The antitrust regulators recognize that in a world economy, there are not that many monopolistic players out there.