Everybody’s in the takeover game.
Finding itself no longer the world’s No. 1 producer of aluminium, Alcoa Inc. last week tried to regain the lead with a hostile $27 billion (Rs1.1 lakh crore) bid for Canada’s Alcan Inc. If it can’t buy Alcan, Alcoa itself will be a takeover target. Alcoa shares have risen in recent months for just that reason. The stock has gained 27% this year.
Defying antitrust concerns, Chicago Mercantile Exchange Holdings Inc. has raised its offer for CBOT Holdings Inc. to $9.9 billion. The combination would dominate trading in futures for interest rates, stock indexes and currencies.
CBOT, which owns the Chicago Board of Trade, rejected a higher bid from Intercontinental Exchange Inc., which trades oil and other commodities. Don’t be surprised if the spurned suitor raises its own bid. Even Warren Buffett, that most rational of investors, is talking takeover. Berkshire Hathaway Inc., his investment company, has $40 billion in cash and it’s burning a hole in Buffett’s pocket. He said last week he was looking for a deal worth $40-60 billion, selling stock Berkshire now owns to get up to the higher figure.
No company is safe from a predator’s clutches. The Bancroft family, which has controlled Dow Jones & Co., publisher of The Wall Street Journal and a business news service, since 1902, may be forced to sell in spite of itself. Rupert Murdoch’s News Corp. has bid $60 apiece for Dow Jones shares—65% more than the market price before news of the bid broke. The Bancrofts will probably refuse Murdoch’s offer. They have kept 64% control of the company especially to keep down-market acquirers like Murdoch at bay. Still, Murdoch’s move may encourage other high bids that the family might feel forced to accept.
Once takeover fever takes hold in an industry, it seems unstoppable. With Dow Jones in play, Thomson Corp. bid £8.77 billion (Rs71,037 crore) for Reuters Group Plc. to form the biggest company supplying business news and information. Bloomberg LP competes with Dow Jones and Reuters.
In the metals business, Arcelor Mittal became the biggest steel producer on a series of takeovers, notably Mittal’s hostile bid for Arcelor. Phelps Dodge Corp., a copper producer, failed to buy two other metals companies and then was itself acquired by Freeport-McMoRan Copper & Gold Inc.
Financial exchanges have been another hotbed for acquisitions. NYSE Euronext, for instance, is the combination of the New York Stock Exchange, the world’s largest stock market, and a stock exchange in Europe.
Banks have been merging in straightforward, cost-cutting fashion for years. Today we have the convoluted $100 billion battle over the Netherlands’ ABN Amro Holding NV. Barclays Plc. wants it all and a team led by Royal Bank of Scotland Group Plc. would break it up. ABN Amro’s LaSalle Bank in Chicago may be sold separately in any event.
This is clearly a takeover era without rival. So far this year, there have been deals announced globally with a total value of almost $2 trillion. Acquiring corporations borrow money at relatively cheap rates. Buyout firms have oodles of cash from investors who think takeovers will beat prosaic investments in stocks and bonds. Bids to take public companies private have reached $43 billion, the amount being paid for TXU Corp., a Texas producer of electric power. Wall Street investment bankers eagerly promote deals that will fetch nice fees.
Takeovers at huge prices in commodity businesses like steel, aluminium and copper seem based on two notions that aren’t necessarily true: The boom in metals prices will never end; and companies need to be big to compete.
Some takeovers work and corporate bosses have always liked to run bigger and bigger companies. It’s hard to underplay the role of coercion here, however. Companies are being forced into acquisitions, taking on the inevitable problems of forging two enterprises into one and perhaps cutting costs beyond reason to justify the prices they pay.
Merger proponents might say takeovers are a form of “creative destruction.” The term was popularized by Austrian- born economist Joseph Schumpeter, who said innovation that wreaks havoc with established companies is necessary for long-term economic growth.
At their current mad pace, takeovers may merely destroy without creating.