Corporate Diversification

History of Mergers and Acquisitions

American business history demonstrates clear patterns of consolidating businesses through combinations.

1879 - 1890. The Trust Era: A trust is created when competing firms give up their shares to a trust company which issues to the firms a trust certificate (a receipt) which could be sold on the market as common shares. However, the trustees held the firm's stocks and exercised stockholder control over participating firms. The trust creates monopolistic control over industries beyond the influence of government regulation or stock markets. Through the trust Standard Oil Company acquired control over 90% of the country's refining capacity. The success of Standard Oil lead to other trusts in cotton, linseed, lead, distilleries, sugar, and cord. The Sermon Antitrust Act of 1890 made such trusts illegal, although no successful legal action under the act was taken until 1904. The Standard Oil trust was broken in 1911.

1887 - 1904. This wave of mergers started at the end of a depression in 1883 and ended with the depression of 1904. During this episode of mergers, consolidation was characterized by multiple companies combining into a single large firm. In 1901 the U.S. Steel Corporation combined 785 plants into the largest corporation. One researcher found that 78 firms controlled at least 50% of their industry's output, another 26 controlled a market share of 80% or more (Moody, 1904).

1916 - 1929. Post WWI merger activity was halted by the 1929 stock market crash. During this episode, utility companies consolidated into pyramidal holding companies which collapsed during the depression of 1930's. The period saw an increase in the use of vertical integration and of diversification as merger strategies.

1950 - 1969. Post WWII merger activity abated with a decline in stock market values and the advent of the 1973 recession. During this period most mergers achieved diversification, and there was a sharp decline in horizontal mergers. Financial innovations, such as the use of convertible stocks and debentures ("funny money"), facilitated the buy out of targeted company's stockholders.

1976 - 1980's. Post-Vietnam recovery and relaxation of anti- trust regulations under Reagan mark this wave of merger activity. During this period, stock prices were low compared to asset values for many firms, and shopping for bargains motivated many acquisitions. One corporation's divestiture would become another's acquisition. Hostile takeovers and raiding often ensued, prompting some targeted firms to seek acquisition by more favorable acquirers ("white knights"). New financing techniques, such as the use of "junk bonds" in LBO's, allowed acquirers to offer common stockholders cash for stocks in nearly three forth of all recorded acquisitions. Previously, acquisitions were typically made by exchanging new stocks or bonds for old. Under a leveraged buyout (LBO) an investor puts up a small amount of equity and borrows the bulk of the funds required to purchase stocks. When junk bonds are used, high interest rates must be paid to bondholders because of h higher risk. This risk is attributed to the facts that they can be easily defaulted and are paid off only after all other bonds are paid if the company goes broke. Investors are willing to pay higher interest to junk bond holders because the interest is tax deductible (and about half the costs of interest are actually expended), and they believe that earnings from the acquired business will cover interest payments.

History of the largest mergers during this period is instructive:

RJR Nabisco. The largest acquisition of the 1980's was by Kohlberg-Kravis-Roberts who in 1989 paid $9.6 billion. The book and movie "Barbarians at the Gate" made this acquisition a classic study in business. To meet the costs of debt service (interest payments on the large debt), KKR broke-up the company and sold off assets. ConAgra acquired the Del Monte frozen food business - including the brands Morton, Patio and Chun King. The company has gone public and in 1999 changed its name to Nabisco Group Holdings to distance
itself from tobacco. R.J. Reynolds Tobacco, the #2 US cigarette company, has been spun-off. In a stock distribution on June 14, 1999, shareholders received one share of R.J. Reynolds Tobacco common stock for every three shares of RJR Nabisco common stock. Nabisco Group owns 80.5% of Nabisco.

Federated Department Stores. Bought by the Canadian retailer Campeau Corporation for $7.4 billion in a LBO, the Canadian investor failed to make the operations profitable and began selling assets. In 1990 the company filed for bankruptcy. A new publicly held Federated Department Stores, Inc. emerges in 1992. Macy's is acquired after filing for bankruptcy in 1992. Federated is the largest upscale department store retailer in the US, with over 400 stores in 33 states. In addition to its prestigious Bloomingdale's and Macy's chains, Federated runs six regional chains: Lazarus, The Bon Marche, Burdines, Stern's, Rich's, and Goldsmith's. The company has recently acquired catalog and Internet marketer Fingerhut Companies.

Beatrice. This dairy and foods company was acquired by Kohlberg-Kravis-Roberts for $6.2. The Beatrice businesses were broken-up and resold, the largest assets going to ConAgra in 1990. Beatrice's European operations were sold to Reginald Lewis. Lewis's TLC Beatrice was the largest black-owned business in the US. After his death, TLC Beatrice has sold off the bulk of its operations and will soon disappear. The Beatrice Group of ConAgra continues to operate.

Safeway. Another Kohlberg-Kravis-Roberts LBO for $5.7 billion, after a turnaround Safeway went pubic in 1990. The company is one of the nation's largest food retailers, with more than 1,500 stores located mostly in the western regions of the US, the Mid-Atlantic, and Canada. Today Kohlberg-Kravis-Roberts owns about 9% of Safeway.

Southland (7-11 Stores). In a MBO, CEO J.P. Thompson acquired 7-11 for $5.1 billion. Unable to service the debt, Thompson turned for help to the Japanese retailer and investor Ito-Yokado who in 1991 acquired the company. The 7-11 company runs the world's largest chain of convenience stores, including more than 5,600 stores in the US and Canada under the 7-Eleven name (about half are franchised). 7-Eleven also has nearly 13,000 licensed 7-Eleven stores in the US and 16 other countries. Japanese retailer Ito-Yokado owns 51% of licensee Seven-Eleven Japan (which operates more than 7,200 stores in Japan and Hawaii) and 65% of 7-Eleven, Inc.

Hospital Corporation. Once the largest for-profit hospital corporation in the world, CEO T.F. Frist led a MBO with financial backing from Rockefeller Goldman Sachs, Morgan Guaranty, and R. Rainwater to acquire the company for $4.9 billion. The company sold its HMO business and in 1995 merged with Columbia. As Columbia/HCA the firm is now publicly held, but is struggling for capital update aging hospitals. The company has suffered management problems and there is a federal investigation into its Medicare and patient-referral policies. It has sold its prescription benefit management unit and spun off dozens of hospitals.

Borg-Warner. Acquired by Merril-Lynch for $4.2 billion, the chemicals division was sold to GE and the credit information services division was sold to TRW. In 1993 the automotive and technology manufacturing company went public.

Montgomery Ward. CEO B.F. Brennan in a MBO took the company private for $3.8 billion. Brennan reduced debt and improved performance. Today Ward's Holding Company remains the US's largest privately owned
retailer. Wards operates about 250 Montgomery Ward department stores in 30-plus states.Wards is operating under Chapter 11 and has closed more than 100 full-line and specialty stores. As part of Wards' reorganization, General Electric bought the 50% of the company it doesn't already own. Former Wards chairman Bernard Brennan owns 20% of the company.

R.H. Macy (Macy's). CEO E.S. Finkelstein led a $3.7 billion MBO and almost immediately fell into bankruptcy. In 1994 Macy's was acquired by Federated, creating the largest department store retailer in the nation

MergerStat provides the following information for a longer term view of M&A:

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More Than 30 Years of M&A Activity

⁽¹⁾ The Base is the number of deals disclosing a price.
⁽²⁾Aggregate value is calculated on the Base Equity price offered for all transactions in the base. The Base Equity price is the price paid to shareholders of a target and may include the following as tender: cash, stock, notes, convertible debt, preferred stock, convertible preferred, warrants/options, contingent payout and future payout amount.
⁽³⁾Through 08/28/00 11:44:37 CDT.

Top 10 Deals for 2000⁽¹⁾

⁽¹⁾Based on announced deals as of 08/28/00 11:56:09 CDT .
⁽²⁾Value is the Base Equity price offered. Base Equity is the price paid to shareholders of a target and may include the following as tender: cash, stock, notes, convertible debt, preferred stock, convertible preferred, warrants/options, contingent payout and future payout amount.