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Spokane, Washington  Est. May 19, 1883

Corporate Mergers Surge 25%, Hit Record $1.04 Trillion In 1996 Increased Competition Provides Incentive For Unions

Katherine Burton Bloomberg Business News

Corporate mergers around the globe surged 25 percent to a record $1.04 trillion in 1996, propelled by record stock prices and low interest rates.

The value of this year’s 22,000 mergers surpassed last year’s record of $866 billion, according to Securities Data Corp., a Newark, N.J., firm that tracks the securities industry. Takeover bankers expect 1997 to be at least as busy.

“The merger market will continue to be very strong for at least another 18 months,” said Hal Ritch, co-head of mergers at Donaldson, Lufkin & Jenrette Inc. “I don’t see anything shutting it down.”

The same environment that spawned the rise in mergers and acquisitions this year is expected to continue in 1997. Regulatory changes and the threat of increased global competition will encourage telecommunications companies, broadcasters, utilities and financial service companies, among others, to combine in order to slash costs and boost revenue.

Chief executives can consider mergers because business, in general, is pretty good, investment bankers say.

“When business is chugging along, it allows CEOs the luxury to sit back and focus on the big, strategic picture,” said Mark Davis, head of M&A at Chase Manhattan Corp.

The unions will be possible because interest rates are expected to stay at relatively low levels, meaning companies can afford to borrow cash to buy other companies. And as long as stock prices stay high, corporations will have the option of using their own shares to make purchases. A stock swap allowed Swiss drugmakers Ciba-Geigy AG and Sandoz AG to plan the biggest merger ever this year, valued at $36.3 billion on the day it was announced, breaking the previous record of $26.4 billion for the Kohlberg Kravis Roberts & Co.’s 1989 buyout of RJR Nabisco Inc.

Companies are being forced to merge in response to the threat of increased competition, both at home and abroad, analysts say.

“Most industries have a great deal of overcapacity, especially for companies that compete on a global basis,” said Peter C. Davis, a partner at Booz Allen & Hamilton Inc., a New York-based management consulting firm. That phenomenon will continue to fuel mergers in telecommunications, aerospace, technology, media and financial services, he said.

Earlier this month, Boeing Co. announced it would buy McDonnell Douglas Corp. for $13.3 billion in stock, extending Boeing’s pre-eminence in commercial aircraft and making it the No. 1 maker of military planes. That merger will put pressure on European defense contractors to combine or at least form alliances in the coming months.

To build economies of scale in technology and cut costs of administration, banks, fund companies and insurers have all joined forces this year. Three of the five top mergers in Europe were of financial services companies.

French insurers Axa SA and UAP SA announced a merger to create the world’s second-largest insurer. Sweden’s largest insurer, Skandia Insurance AB, bought that country’s largest mortgage bank to create one of the Nordic region’s biggest financial institutions. Royal Insurance Holdings Plc merged with Sun Alliance Group Plc to form the U.K.’s second-largest publicly traded insurer.

Telecommunications was the hottest U.S. industry for mergers this year, accounting for $120 billion in combinations, according to Securities Data, and included the four biggest transactions: Bell Atlantic and Nynex, MCI Communications Corp. and British Telecommunications Plc, Pacific Telesis Group and SBC Communications Inc., and MFS Communications and WorldCom.

Regulatory changes prompted the phone company mergers.

Radio and television broadcasting mergers were a distant second, totaling $37 billion. The biggest was US West Media Group and Continental Cablevision Inc., valued at $11.8 billion.

The third-busiest industry for mergers was the utilities business, which accounted for $32 billion of the total.