Deregulation Drives 40 Percent Increase In Mergers, Acquisitions Trends Are Expected To Continue This Year, Analysts Predict

Mergers and acquisitions soared 40 percent to more than $1.6 trillion in 1997, a record that was fueled by deregulation, low interest rates, booming stock markets and a need for companies to compete globally.

These trends are expected to continue in 1998, investment bankers and analysts said.

“I’ve never seen a set of factors come together like this,” said Steven Wolitzer, head of mergers and acquisitions at Lehman Brothers Inc. “A healthy economy, a very strong stock market, low interest rates, a great financing market both here and abroad all growing at the same time for most of the year.”

More than 22,000 transactions, spanning industries from banking to telecommunications, constituted this global urge to combine.

Among the year’s marquee mergers were WorldCom Inc.’s agreement to buy MCI Communications Inc. for $42 billion, the biggest acquisition ever; Union Bank of Switzerland’s decision to combine with Swiss Bank Corp. in a $23 billion stock swap, creating the world’s second-largest bank; and U.S. electric company PacifiCorp’s bid for U.K.-based Energy Group Plc for $9.7 billion - a proposal that makes it one of the biggest-ever cross-border utility transactions.

In 1996, the value of all mergers and acquisitions was $1.14 trillion, according to Securities Data Corp. in Newark, New Jersey.

“Merger activity is created by growth and change, and as long as we have those two things we will have mergers,” said Steven Heller, head of M&A at Goldman, Sachs & Co., the No. 1 merger adviser, according to Securities Data.

Behind this year’s record pace is steady economic growth in the U.S. and the U.K., as well as a recovery on continental Europe.

“Every country is behind the U.S. in the forces that have caused the U.S. deals in the form of active shareholders, active boards, deregulation - that kind of fundamental driving force just now starting to drive some foreign companies,” said Rick Escherich, a managing director in M&A at J.P. Morgan & Co.

Investment bankers predict that 1998 will see an increase in the number of transactions in continental Europe as the formation of a single economic body and the privatization of some of Europe’s largest companies, such as Deutsche Telecom, force companies to seek sleeker, more efficient operating systems. Preparations for the single European currency in January 1999 will add to the pressure.

One of the first examples of that, bankers said, is the Union Bank of Switzerland-Swiss Bank agreement.

Cross-border transactions are expected to increase. Telecommunications agreements, in particular, should jump in 1998 as World Trade Organization restrictions are lifted on how much of a U.S. telephone company a non-U.S. firm can own.

“It was a great year, and the factors that made this year busy should make it again next year,” said Gordon Rich, co-head of mergers and acquisitions at Credit Suisse First Boston.

“If there is a story in 1998, it’s that we expect there will be a significant increase in cross-border activity precipitated by the need to become more globally competitive,” said Robert Cotter, co-head of mergers and acquisitions at Salomon Smith Barney Inc.

Chief executives, after years of rising profits, were confident enough this year to risk making big investments, investment bankers say. Companies were also driven to make acquisitions because buying a unit with a new product or service is faster than building a business as companies rush to grow and take advantage of the expanding economy.