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May 10, 1993
"Where Have All the Takeovers Gone?"
San Jose Mercury News

By Timothy Taylor
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TAKEOVERS, leveraged buyouts, and mergers and acquisitions were the dragons of the corporate world just a few years ago. The issue was whether their fiery breath was goading top executives to work harder, or just incinerating America's economic future.

But takeovers haven't caused much huffing and puffing in the 1990s. Between 1980 and 1988, the number of mergers and corporate transactions per year nearly tripled, and the dollar value of those deals increased sevenfold. Since then, the number and value of deals has fallen back to the levels that prevailed in the early 1980s.

Like astronomers after the passage of a comet, we can now look back over the trail of takeovers, trying to figure out where they came from, where they went, and whether their passage portends good or evil for the U.S. economy.

Takeovers were often portrayed by the media as a sort of clash of the titans, featuring struggles between morally neutral demigods like T. Boone Pickens, Carl Icahn, Michael Milken, and others. But from a more functional, less dramatic point of view, the deal-making of the 1980s accomplished one main task: It led to corporations paying out money to shareholders.

This happened in a variety of ways. In the case of takeovers, an acquiring company payed the shareholders of the firm it was gobbling up. In the case of a leveraged buyout, borrowed money was used to purchase stock and take control of a company. Many firms reacted to the threat of takeovers by repurchasing their own shares, thus transferring funds to their own shareholders directly.

"Takeovers and financial restructurings were devices the financial markets used to discipline corporate managers and pressure them to pay out more money to shareholders and other investors," writes Margaret M. Blair of the Brookings Institution in "The Deal Decade," a recently published collection of essays about takeovers and leveraged buyouts in the 1980s.

Blair points out that the real interest rate on safe investments like government securities was very high in the mid-1980s; for example, Treasury bills were paying 12 percent interest in 1984, while inflation was just 4 percent. The availability of such high, safe interest rates put pressure on corporations to pay out funds to shareholders.

The public distrusts takeovers and financial deal-making. One reason is that many people have a visceral distaste for finance. In addition, the efficiency benefits of takeovers are dispersed and unannounced. No company puts out a press release that says: "Thank heavens for takeovers. We've been terribly inefficient, but because our CEO is terrified of being bought out and losing his job, we've pulled our act together."

Takeovers do deserve some credit for the strong performance of the stock market and the rise in productivity since the late 1980s. They focused management's attention on taking care of business; or as Blair puts it, "the specific sin of management that the financial markets were eager to correct was managers' tendency to build empires."

But markets can easily supply too much of a good thing, which seems to have happened with takeovers.

As the 1980s progressed, the deals got bigger and bigger, culminating in the mammoth $25 billion buyout of RJR Nabisco by Kohlberg, Kravis, Roberts & Co. back in 1989. The acquiring firms paid higher and higher prices, and the economic gains diminished. Deals were driven more by those who controlled the creative financial instruments -- junk bonds, auction rate preferred stock, master limited partnerships and more -- than by the actual business managers. Of course, a takeover gone wrong is just as economically destructive as any other misguided investment: people lose jobs, plants shut down, investment is cut.

Just as troubling is how takeovers have affected implicit relationships between companies and their home communities, their middle management and their suppliers. Even the most sophisticated economy runs to some extent on trust, that is, on long-term commitments that are not written into formal contracts. But after economic dislocations of recent years, communities, workers and suppliers must hesitate before making any long-term commitments to a company that could be bought out next month or next year.

By the early 1990s, takeovers were on the downslope. Lower interest rates meant that corporations no longer felt as much pressure to generate immediate returns. As the deals became less profitable, and as recession hit in 1991, less money was available for financing takeovers. Under pressure from companies concerned about becoming takeover targets, and with the support of citizens suspicious of wheeler-dealers, many states passed laws to assist firms in fighting off unwanted acquisitions.

My guess, for what it's worth, is that the cumulative effect of the takeovers of the 1980s, lumping together the good with the bad, was positive for the economy. To put it another way, I'd rather have private investors risking their own capital in mergers and acquisitions, and sometimes making mistakes, then to have all such deals forbidden, or to have politicians or courts deciding who will own and run America's companies.

The chart shows the value of mergers and corporate transactions for a five- year period.

1987 $344 billion
1988 $596 billion
1989 $461 billion
1990 $249 billion
1991 $176 billion

Source: Securities Data Company, The Merger Yearbook. Data for 1992 not yet published.

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