Stock Plunge Threatens Mergers Diminishing Value Of Shares May Derail $14 Billion In Deals

The plunging stock market threatens to derail $14 billion of mergers among U.S. companies this year, as the value of the shares counted on to pay for the transactions erodes.

On Wednesday, retailer Phar-Mor Inc. scrapped its $870 million acquisition of Shopko Stores Inc. after investor skepticism about combining the companies pushed down Phar-Mor’s stock. Banc One Corp., Tyco International Ltd. and HBO & Co. may also have to revise or cancel merger agreements as their shares fall.

“You’ll probably see some deals fall apart and some get recut,” said Steven Wolitzer, head of mergers and acquisitions at Lehman Brothers Inc.

Mergers surged since 1992, reaching a record $1.14 trillion last year, according to Securities Data Co., partly because the rising stock market encouraged acquirers to pay with their shares. With the Dow Jones Industrial Average down more than 8 percent from all-time highs reached last month, sellers aren’t sure the stock they’re getting will hold its value.

“Almost always when you see a down-draft, you see a lot of gnashing of teeth and renegotiation of deals,” said Herald Ritch, co-head of mergers and acquisitions at Donaldson, Lufkin & Jenrette Inc.

While in the 1980s cash was king in takeovers, hundreds of transactions in the 1990s have been paid for with stock. Stock acquisitions have the advantage of being tax-free and don’t load the combined companies with debt.

Still, to protect themselves, many target companies insist on so-called “collars” which give them the right to renegotiate or back out of a merger if the stock they’re to receive falls below a designated level.

For example, in January Banc One, a Columbus, Ohio-based bank, agreed to buy First USA Inc., the fourth-largest U.S. credit card company, for $7.3 billion in stock. According to the merger agreement, First USA can walk away if Banc One’s average closing price in the ten days before the scheduled closing date falls below $38.60 a share. Banc One’s shares fell 25 cents a share to $39.75 in trading Thursday on the New York Stock Exchange.

Banc One expects to close the transaction on or near May 29. “If there’s a delay, it will only be a matter of days,” said spokesman Jay Gould.

He declined to elaborate, citing Securities and Exchange Commission rules that prohibit companies from talking about pending transactions.

Tyco International, a maker of fire protection systems, earlier this month agreed to buy ADT Ltd. for $5.6 billion in stock. ADT or Tyco can withdraw from the agreement if Tyco trades for less than $56 for 10 straight days starting April 8. Tyco shares traded Thursday at $54.875 and haven’t been above $56 since March 27.

Many companies anticipated the possibility of a plunging stock market in their merger agreements.

Lexington, Mass.-based Raytheon Co., for example, may have to shoulder more debt to buy General Motors Corp.’s Hughes defense business. When the $9.5 billion acquisition was announced in January, Raytheon said it would pay about $5.1 billion in stock and assume $4.4 billion in debt for Hughes.

The merger agreement says if Raytheon stock falls below $44.42, it will have to assume $550 million more in debt. Raytheon shares traded at $43.625 Thursday.

Raytheon isn’t expressing concern yet, partly because the Hughes transaction isn’t scheduled to be completed until September. “It’s terribly speculative to try and determine what the stock market will look like at the end of the third quarter,” said company spokesman Robert McWade.

Though some stock mergers may get shelved, most will be completed, investment bankers say.

“Most of the deals which have a compelling business logic will survive this market,” said Frederic Seegal, president of Wasserstein Perella Group Inc., a New York-based investment bank.