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MERGERS & ACQUISITIONS.

Forecasts likely scenarios for 1991 in context of expansionist practices of Regan era, 1990-91 recession, "reverse leverage."

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Mergers and acquisitions, and leveraged buy outs of corporations in many industries, were conspicuous features of the U.S. economy during the 1980s, particularly the last years of the decade. Reports and rumors of buy outs played a major part in driving the Dow Jones Industrial Average to all-time highs in 1990 following the stock crash of October, 1987. But in 1990, the long expansion of the 1980s came to an end; by the end of the year even the Bush Administration was officially admitting that the U.S. economy was in recession. In the new economic climate, what level of activity in M&A (mergers and acquisitions) and LBOs (leveraged buy outs) can be anticipated for 1991? This is the core question addressed in the following pages.
To understand the prospects for mergers and acquisitions and leveraged buy outs in the coming year, we must first consider a)

Business Week, 3 . (199 , July23). The expansion of Japanese and other foreign penetration of the U.S.market had a similar effect. economy was beginning to slacken off, in spite of some highlypublicized purchases. On the other hand, slow growth in middle-rangeincomes meant that relatively little additional money was available forconsumption of mid-range domestic goods and services. It was also due tobroader economic trends: the decline of relatively high-paid industrialjobs in favor of lower-paid service-sector jobs and foreign competition.As an illustration of the difference between the 198 s expansion andearlier expansions, the overall level of home ownership actually declinedduring this decade, for the first time since the 193 s (Home ownership,199 ). This is the core question addressed in thefollowing pages. Pennar, K. Troubled lending institutions are cutting back on lines ofcredit to business customers, squeezing firms on the capital side.Affluent consumers are seeing their asset values (especially real estate)dwindle, while other consumers are burdened with heavy personal debt loads;thus they cut back spending, squeezing firms on the sales side. This was in part a result of Reagan-era policies, including tax changes and labor policies. Anxietyabout the Persian Gulf crisis has surely contributed to the downturn, butthe downturn began before the Iraqi invasion of Kuwait, and a resolution inthe Gulf will not by itself revive the economy. The outlook: Slowdownsabroad may deepen slump. It is true that lower stockprices will make companies more affordable to would-be purchasers. To understand the prospects for mergers and acquisitions andleveraged buy outs in the coming year, we must first consider a) what drovethese activities during the 198 s, and b) what effects a recession willhave on these conditions. Reports and rumors ofbuy outs played a major part in driving the Dow Jones Industrial Average toall-time highs in 199 following the stock crash of October, 1987. Such, in a thumbnail sketch, were the conditions which drove mergersand LBOs in the 198 s. economy. In adeclining and uncertain economic climate, however, potential lenders may beleery of claims that companies are "really" worth more than the value oftheir stock as reflected in market prices. Note, however, that these purchases are product-synergydriven rather than finance-driven. A1). The recession of 199 -91 appears to be different in character thanother recent recessions. 199 figures, whenavailable, will probably show a sharper drop-off ("Foreign Investors,"199 , p. Business Week, 27-28. Major European stock markets fell heavily in 199 , rangingfrom 17.9 percent in London to 25.5 percent in Paris (Figures for Jan.1-Sep. In the new economic climate, what level ofactivity in M&A (mergers and acquisitions) and LBOs (leveraged buy outs)can be anticipated for 1991? Atthe same time, the deeply troubled U.S. Political factors such as regulatory changes may prevent itsrecurrence over the longer term; during 1991, mergers and buy outs will belimited by capital shortages and the uncertainties of a recession. 46). Inventories have remainedlargely under control, giving some observers reason to anticipate a mildrecession. (1991, January 14). financial sector is in no positionto take up the slack. On one level, this drove up the prices of real estateand "collectibles" such as art works. Japanese policies have tended to depressdomestic consumption and force savings, so that the increasing incomes ofmiddle-income Japanese had much the same effect as an increase of upper-bracket incomes in the domestic economy: Enormous funds were madeavailable for lending and investment, while actual demand for new goods andservice was only modest. Some Japanesecompanies may continue to make strategic purchases (e.g. In any case, the combined effects of the recession and "reverseleverage"--essentially the hangover from the 198 s--are likely to mean thatless money is available, either for lending or for direct investment, thanin the recent past. libraries of video "software," or to Americantalent in entertainment production, a field in which the United Statescontinues to lead. economy during the198 s, particularly the last years of the decade. (199 , October 15). Business Week, 46-47.----------------------- 6 Mergers and acquisitions and leveraged buy outs will not vanish.However, those that occur will be much more selective. 27-28). A1. With littlemotivation to invest in the creation of new capital assets (e.g., plant andequipment), the available funds were instead channeled into a "bidding war"for existing assets. (199 , October15). The Japanese economy, heavily dependent on exports, especially to theUnited States, is likely to encounter its own severe difficulties, and willno longer be a major source of lending capital. (199 ). So long, 'Europhoria'--it was nice while it lasted. The special character of the 198 s expansion had a double impact onthe structure of the U.S. But--as the Savings & Loan crisis and the accelerating problemsof money-center banks have shown--this recession does not, in fact appearto be inventory-driven so much as finance-driven (Cooper & Madigan, 1991,pp. Debtdrove the "merger wave" of the 198 s (Pennar, 199 , p. This 'dwarf recession' might be agiant. 28, 199 .) ("So long," 199 , p. 356ff). References Cooper, J.C., & Madigan, K. One the one hand, the incomes of theaffluent increased sharply, meaning that many additional funds wereavailable for investment. Wall Street Journal, p. Government Printing Office,199 . 3 ). Moreover, there are growing signs that the recession will beinternational. On the other hand, slower economies abroad will mean fewer fundsavailable for investment in or lending to the United States--an importantsource of U.S. The "merger mania" of the 198 s appears over, and may not recur formany years. Malabre, A.A., Jr. Foreign investors bought fewer U.S. By 1989, however, the flow of foreign funds intothe U.S. Overall, then, an enormous pool of dollars was made available toinvestors and lenders, while there was relatively little call forinvestment in new plant and equipment in the U.S. exports, a bright spot in the economy of the late198 s. (1991, January 7). The net capital inflow into the United States was$219 billion in 1988, and only $215 billion in 1989. But in199 , the long expansion of the 198 s came to an end; by the end of theyear even the Bush Administration was officially admitting that the U.S.economy was in recession. The consequence is likely to be a dramatic drop-off in mergers andacquisitions and leveraged buy-out activity. economy. The central feature of the expansion of the198 s, in terms of its role in driving mergers and buy outs, is that it waslargely an upper-income phenomenon. On another level, the same "biddingwar" led to mergers and acquisitions and leveraged buy outs of existingcorporations. Home ownership trends in the 198 s. At some point, as in every bearmarket, the market will probably be "oversold," but investors who werebadly burned in the junk-bond markets (or who imagine that they might be soburned in the future) may conclude that it is safer and sounder to buyequities directly--and have some potential control over the firm--than tobuy high-yield bonds that may later be defaulted on. Census Bureaureport, Series H121-9 -2. Matsushita/MCA).These particular purchases are designed 4 give Japanese manufacturers ofvideo hardware access to U.S. In turn, slowdowns abroad willtend to deepen the slump in the United States On the one hand, there willbe less demand for U.S. Thus the supply of foreigncapital for investment in or lending in the United States is drying up. U.S. Forbes, 146 356ff. For tax reasons, and because debt, unlike equity, does notdilute voting control of firms, much of the available money was lent andborrowed, rather than invested, in the narrow sense, as in equities. capital during the 198 s (Malabre, 1991, p. Growth in that typeof consumption was, indeed, driven largely by consumer borrowing. The strongest Europeaneconomy is Germany's, but German capital will be heavily committed,probably for several years to come, in the reconstruction of easternGermany and more broadly in Eastern Europe. assets last year. The recession: Asnowball rolling faster than anyone expected. Mergers and acquisitions, and leveraged buy outs of corporations inmany industries, were conspicuous features of the U.S. The "typical" postwar recession was inventory-driven. Washington: U.S.

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