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Deals of the Year - J.P. Morgan and Company Inc.; Chase Manhattan Bank N.A

CFO: Magazine for Senior Financial Executives, Jan, 2001 by Alix Nyberg

It's a three-peat. Once again a new record is set for mergers in the United States.

THE YEAR 2000 WOULD SEEM TO HAVE presented enough obstacles to unsettle even the most daring deal makers. But it didn't. Neither careening stock prices nor rising interest rates nor the prospect of a slowing U.S. economy could shake the desire of U.S. corporate managers to merge with and acquire other companies.

Mergers and acquisitions in the United States totaled a record $1.81 trillion through November 28, 2000, according to Thomson Financial Securities Data. That's slightly higher than 1999's level of $1.75 trillion, and marks the eighth consecutive year of rising deal activity in the U.S. market. This is probably as good as it gets for Wall Street investment banks, however. Most analysts expect the volatile capital markets to quiet things down in the coming year.

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OUT OF THE GATES

The year started with a bang, thanks to America Online Inc.'s January engagement to Time Warner Inc. in an all-stock transaction then valued at $350 billion. The Federal Trade Commission has yet to give its blessing to the union. But if a settlement is reached between the company and the antitrust regulator, the deal will be the largest of all time, representing nearly a fifth of total merger volume for the past year.

The deal-making cooled off in the spring as the stock markets took a dive, slowing to a low of $78.7 billion in April. But it heated up again over the summer, with such deals as Deutsche Telekom AG/VoiceStream Wireless Corp. ($41.6 billion) and Chase Manhattan Corp./JP Morgan & Co. ($36.5 billion) topping the list. The September quarter ranked as the third most active in history, with more than $550 billion in announced deals. And the momentum continued through October, when 3 of the year's top 10 deals--Firstar Corp./U.S Bancorp, Chevron/Texaco, and General Electric Co./Honeywell International Inc.--were unveiled. The second half of the year was just as strong as the first, even as stocks-- used as currency in 65 percent of merger transactions--dropped sharply in value.

The chief reason companies are so eager to merge, say experts, is the high premium that investors continue to place on growth. "The only way that larger companies can significantly accelerate their growth rates is to add to their capabilities," says Rick Escherich, a managing director at JP Morgan. "I don't think there's ever been as high a premium paid as this." A recent study by JP Morgan showed that small differences in projected earnings growth make big differences in market valuations. Large companies with projected earnings-per-share growth of 12 to 15 percent traded at an average earnings multiple of 13.7, while those with 16 to 20 percent projected growth enjoyed an 18.4 multiple. Projected EPS growth of 25 to 30 percent commanded an average multiple of 27.3.

JACK'S SWAN SONG

GE's announced acquisition of Honeywell, originally valued at $45 billion, was a prime example of the drive to add growth engines. In fact, engines are a key component of the deal, with Honeywell's $10.5 billion in sales in the aerospace division expected to boost GE's aircraft engine offerings. In addition, Welch claims Honeywell's three other core business units--automated controls, performance materials, and microturbine technology--overlap neatly enough with GE to yield $1.5 billion in overhead savings within the first year.

Some analysts were dismayed by the price tag, especially given GE'S usual finesse in acquiring companies at bargain-basement prices. But, according to Merrill Lynch & Co. first vice president Jeanne Terrile, the acquisition may help stem the slide of a price/earnings ratio that she expects will fall from 46.5 in 1999 to 33.8 in 2001. "Honeywell could provide earnings momentum of the old-fashioned kind, like better margins and more productivity, when more cyclical businesses such as Power Systems slow down two or three years from now," Terrile wrote in a recent report. Of course the deal has another fringe benefit. It's big enough and challenging enough to convince CEO Jack Welch to stick around for another year before handing the reins to recently anointed successor Jeffrey Immelt.

The pace of technology-related mergers cooled off in the second half, along with stock prices, but high-valued deals among Internet companies (like the $15 billion merger between VeriSign Inc. and Network Solutions Inc., and the Telefonica SA/Lycos Inc. deal, originally valued at $12.5 billion) boosted volumes in the first half. More traditional industries also saw consolidation trends continue. In the banking and finance sector, volumes were boosted by three deals valued at more than $20 billion each, and four more valued at between $5 billion and $10 billion. The oil and gas industry also saw another major merger, with Chevron Corps $35.8 billion bid for Texaco Inc. putting it in league with the BP Amoco and Exxon/Mobil deals of previous years.

In some of 1999's hottest sectors, such as pharmaceuticals and telecoms, deal volume fell sharply, due to fewer numbers of large deals. For example, the telecommunications sector took a big hit in 2000, losing about 30 percent in volume over 1999, even as the number of deals increased by 18.4 percent, according to Thomson Financial Securities Data. Without the $41.6 billion Deutsche Telekom/VoiceStream deal padding the numbers, the drop-off would have been even more dramatic. "They don't have any money," explains Paul Hammer, head of the Tech Media Telco Group of Houlihan Lokey Howard and Zukin, a Los Angeles-based investment bank. "The telecom sector has gone into contraction mode now that they've discovered acquiring customers is a little bit more difficult than they thought."

Business Services Industry

Deals of the Year - J.P. Morgan and Company Inc.; Chase Manhattan Bank N.A

CFO: Magazine for Senior Financial Executives, Jan, 2001 by Alix Nyberg

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