View From City Road: Merger mania has its logic
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Your support makes all the difference.Should we be worrying about another hangover from America's passion for takeover binges, like the one that followed the 1980s merger mania?
So far the evidence is reassuring. In pharmaceuticals, media and communications, defence, financial services and computers, structural change is driving companies to merge.
The merger mania of the 1980s was driven primarily by valuation and break-up criteria, which were thought to justify highly geared takeovers and buyouts. Few if any bids in the last couple of years have been justified on such grounds.
Managements now cite structural change, shifts in technology and the need to cut costs through rationalisation and lay-offs as their driving force. Defence mergers have been fuelled by government spending cuts and the belief in the industry that the Clinton administration's promise that procurement programmes will grow again from 1996 is so much hot air. It is a case of merge or die.
Activity in the pharmaceuticals sector is of a different nature, but still it is driven by an internal industry logic as companies struggle to meet the challenge of expiring patents and continuing pressure on prices. Media, telecommunications and computing are playing out a complex game, preparing for technological and regulatory changes that cannot yet be quantified. The spate of mergers and takeovers so far seen in the US is more akin to hedging than speculating.
Any outburst of merger mania leads to some fancy prices being paid. The jury will be out for a long time on whether Paramount was too dear for Viacom. Nevertheless, if US industrialists and Wall Street investment bankers have got it right this time, many American companies will emerge superbly placed for the rest of the decade.
Europe may find itself left behind. It is hard to see how many European companies should respond in these fast-moving industries. The key problem is that where consolidation is required the barriers to cross-border mergers and rationalisation on the Continent are still too powerful to allow it to happen. The consequence is that Europe as a whole might find it hard to meet the new American challenge, especially in defence, computers and communications technology.
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