THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, October 6, 1996 TAG: 9610050671
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: 111 lines
Since the first of the year, Virginia-based companies have been merging at a frenetic pace - a trend that could mean trouble for some employees but greater earnings for investors.
The number of mergers and acquisitions for the first nine months of 1996 jumped to 147 - up from 92 for the same period last year, according to Houlihan Lokey Howard & Zukin, an investment banking firm that tracks merger activity.
The value of those transactions - $12.89 billion - is almost double the $6.78 billion total for the comparable period last year.
Some of the sectors where Virginia-based companies have been active buyers or sellers this year include insurance, finance, retail and electric power.
One company, United Dominion Realty Trust Inc., is about to become the nation's second-largest real-estate investment trust specializing in apartments. Last week the Richmond-based real estate investment trust announced a $312 million deal with South West Property Trust, a Dallas-based concern with 15,000 apartment units. The transaction is due to be completed at yearend.
Virginia's appetite for mergers is part of a nationwide trend.
The number of mergers and acquisitions announced nationwide during the first nine months of 1996 reached a record 4,246, Houlihan Lokey Howard & Zukin reported last week. That exceeded the record of 3,510 set in 1995.
With $328.9 billion of mergers and acquisitions announced so far this year, the year's total is likely to surpass last year's record-setting $362.3 billion, the Los Angeles-based investment banking firm said.
The pace of activity is being driven partly by the subdued growth of the national economy, which has made it more difficult for some companies to raise their prices. To bolster earnings, these companies have to expand their operations and spread their fixed costs over a broader base.
The pursuit of greater efficiency is one reason for United Dominion's merger with South West Property Trust.
``This gives us more buying power for our goods and services,'' said Francine Farquhar, a spokeswoman for United Dominion. Being a bigger company also enables United Dominion to reduce the cost of capital needed for continued expansion, she said.
In industries like meatpacking that have been saddled with excess capacity, it's often cheaper to buy existing facilities than build new ones. Norfolk-based Smithfield Foods Inc., which agreed to buy a small meat-processing operation in Florida, has become a major force in pork packing and processing by acquiring troubled companies and making them more efficient.
Under prodding from investors, many diversified companies have narrowed their focus to the most productive lines of business. Often, that means selling operations that are profitable but don't fit.
``Even a healthy business requires management time and capital that could be put to work elsewhere,'' said Louis A. Paone, an investment banker in the McLean office of Houlihan Lokey Howard & Zukin.
Among Virginia companies, Arlington-based newspaper publisher Gannett Co. announced an agreement earlier this year to sell its polling subsidiary, Louis Harris & Associates. And mortgage-banking company Resource Mortgage Capital Inc. in Richmond has agreed to sell its residential mortgage and mortgage-servicing units.
For shareholders of companies being acquired, robust merger activity often means a greater profit on their investment than what they would otherwise earn. For employees of acquired companies, the results often are less favorable. Mergers and acquisitions typically involve scaling back or eliminating overlapping operations. That, in turn, means letting some employees go.
Still, the sorts of mergers occurring in recent years have been more disciplined than those carried out in the 1980s when transactions frequently were based on the prospect of earning a quick profit.
``There are not a lot of deals done for purely financial reasons,'' said Guy W. Ford, director of research at the Richmond-based brokerage firm Scott & Stringfellow Inc. ``With slow internal growth, deals are driven more by cost-saving opportunities.''
How much longer can the latest wave of merger activity continue?
``I don't think you'll see record levels year after year. That's asking a lot,'' said Paone of Houlihan Lokey.
However, conditions are likely to remain strong for the balance of this year and into 1997, he said. In part, that's because the prices being paid in most mergers and acquisitions have remained reasonable.
One condition that could hamper merger activity would be falling stock prices. Many of the deals being put together involve an exchange of shares. If the price of the buyer's stock falters, shareholders of the targeted company may get cold feet.
That happened last week when the shares of Republic Industries Inc., a large waste-disposal and security alarm company, tumbled. ADT Ltd., a security-alarm company, had agreed to an offer from Republic worth $4 billion. When Republic's shares lost value, ADT bargained for better terms, and Republic eventually called off the deal.
If stock prices do skid, merger activity isn't likely to disappear. Many companies are stronger financially than they've been in years and have the capacity to borrow funds for mergers. In addition, some have accumulated plenty of cash that they can put to use in mergers.
``There's a lot of money out there,'' said Guy W. Ford, research director at the Richmond-based brokerage firm Scott & Stringfellow Inc. ``There are excess funds washing over into the financial markets because they have to be used somewhere.''
In addition, several buyout funds on Wall Street have billions of dollars sitting on the sidelines waiting to make acquisitions, Paone said. ILLUSTRATION: JOHN EARLE/The Virginian-Pilot
Graphics
VP
MERGER MONEY
VIRGINIA-BASED COMPANIES INVOLVED IN MERGERS THIS YEAR
SOURCE: Mergerstat division of Houlihan Lokey Howard & Zukin
[For complete graphics, please see microfilm] by CNB