| BIG DEAL: 2000 and Beyond |
By Bruce Wasserstein
Genre: Business & Money
(The buy button will take you to the standard print edition of this book at Amazon.com. From there you will be able to see if the book is also available in large print or audio.)
The Digital World Cometh
Sir Winston Churchill,
Speech at Harvard,
September 6, 1943
The dawn of the new millennium has been accompanied by a frenetic quest for the business model of the future. Companies are scrambling to respond to and anticipate a new industrial revolution in which business is globalized, new technologies emerge, the Internet becomes a vital medium for commerce, and regulatory barriers begin to break downin short the coming of the digital age.
WorldCom: Challenging AT&T
In the whirlwind of this digital age, the pace of change has accelerated. The dramatic $129 billion merger of MCI WorldCom with Sprint to challenge AT&T for leadership in global telecommunications underscores the intensity of the restructuring. The Telecommunications Reform Act of 1996, new digital technologies such as fiber optic cables, the Internet, and wireless telephony, and soaring share prices have unleashed a frenzy of record-breaking deal activity in the industry.
MCI WorldCom Chief Executive Bernie Ebbers will now be able to provide fully integrated voice and data services, over wireless or land lines. The combined company merges the second- and third-largest long-distance carriers in the U.S. to control a third of the nation's $90 billion business, provides a majority of the country's Internet backbone, and owns one of the fastest-growing nationwide wireless PCS service providers, Sprint PCS, which has focused on wireless Internet communication.
Viacom-CBS: Media Giant of the Digital Age
Supersalesman Mel Karmazin had just emerged from a boardroom coup, becoming the new CEO of CBS to a roaring ovation from the stock market. Throughout his career the tenacious Karmazin was able to anticipate the implications of the changes in the regulatory environment, such as the allowance of multiple radio station ownership. With the recent modifications in the limits on TV station ownership and the explosive impact of technology such as the Internet, he saw a pressing need for greater mass and distribution muscle.
The street-savvy Karmazin made his pitch to Sumner Redstone, the seventy-six-year-old controlling shareholder of Viacom, the home of Paramount, Nickelodeon, and MTV. Redstone brushed Karmazin away. Redstone had just completed focusing Viacom on its core media and entertainment assets and cleaning up its balance sheet: Paramount studios had a series of box office hits; Blockbuster, Viacom's video rental chain, had a successful initial public offering; and non-core assets such as Simon & Schuster's educational division had been divested; Viacom's debt burden had been pared down substantially.
Mel kept coming. Finally, he convinced Redstone that the digital future of the media industry required the participants to pool their assets, culminating in the announcement on September 7, 1999, of the seminal $41 billion Viacom-CBS merger.
DaimlerChrysler: An Automotive Leader
As Juergen Schrempp chainsmoked through a pack of cigarettes, Robert Eaton listened with great interest. The two executives were sitting at the President Wilson, a hotel by Lake Geneva, hashing out the plans for the merger between their companies: Daimler-Benz and Chrysler. Finally Schrempp seduced Eaton into the largest industrial deal ever.
Each company was attempting to solve its own dilemma. Daimler saw a future with stagnant sales: Its existing markets were becoming saturated and its vehicles were too expensive for most emerging markets. It lacked either minivan or broad SUV products.
Chrysler too was finding its home market, the U.S., increasingly saturated, but found options abroad limited, since it did not have the same presence overseas that GM and Ford enjoyed. Furthermore, because it was the smallest of the three U.S. carmakers, it had fewer vehicles over which to spread its costs, making it increasingly less able to invest in advanced technology. Globalism and changes in technology had driven the necessity to larger scale.
BP-Amoco and Exxon-Mobil: The Titan Recombined
In 1911, with the mere stroke of a pen, the government broke up John D. Rockefeller's empire: Standard Oil. The company, which before the proceedings controlled 85 percent of the country's oil production, emerged as seven separate pieces: Standard Oil of New Jersey (Exxon), Standard Oil of New York (Mobil), Standard Oil of California (Chevron), Standard Oil of Ohio (BP's American subsidiary), Standard Oil of Indiana (Amoco), Continental Oil (Conoco), and Atlantic (ARCO).
But in 1998, as if by magnetic force, the pieces of Standard Oil began to recombine in a whirlwind of activity. The search for global economies of scale was again the spark that ignited the fire. In an environment in which oil exploration costs were rising steeply but oil prices were at half the level of the previous yeardown from $20 to $11 a barreloil combinations looked especially attractive. Indeed, it was an industry in distress. The dreams of lower exploration costs, lower administrative costs, and greater stability could be realized through mergers.
Sir John Browne, chief executive of British Petroleum, moved first, announcing a merger with Amoco in August 1998 to form Britain's largest company.
Exxon and Mobil quickly followed with an announcement of their $86.4 billion combination. When the deal closes, Exxon Mobil will be one of the world's largest companies in terms of revenue, surpassing Royal Dutch/Shell in both output and sales, and will produce more oil than the entire country of Kuwait.
But Browne was not to be outdone. When an ailing ARCO, badly bruised from the crash in oil prices, shopped itself around to suitors, Browne sprang to action. In April 1999, BP Amoco announced its purchase of ARCO for $33.7 billion. The deal vaulted BP Amoco to the top of the pack, the largest non-OPEC producer of oil in terms of output.
Citigroup: The Global Financial Institution for the New Millennium
Catching digital fever, Travelers and Citicorp merged, hoping to be poised to be the leading financial institution for the new millennium. It is a global powerhouse, whose stated goal is to provide insurance, mutual funds, and consumer, commercial, and investment banking services to 100 million customers in 100 countries. It manages over $700 billionnearly one third the federal budget. Its immense asset base will be a source of enormous competitive advantage and will help Citigroup weather market downturns. Its brand, "Citi," is recognized worldwide.
The deal was most stunning, however, because its success was predicated upon the tearing down of a law that has regulated the banking sector for half a century: the Bank Holding Company Act, which prohibits banks from engaging in insurance underwriting. If the act is not repealed or revised, Citigroup will have five years to divest itself of its noncomplying insurance operations, which comprise approximately 20 percent of Citigroup's revenues and whose combination with Citicorp's banking assets was one of the strategic imperatives of the deal. But it is increasingly likely that the law will be altered so as to make such transactions legal.
AT&T: Telephony for the Twenty-first Century
AT&T, once a sleepy monopoly phone company, has attempted to reinvent itself for the twenty-first century. Though in the last few decades the telco frequently stumbled, it seems as though AT&T might have traction. Over the course of the past year, AT&T has acquired a premier group of assets to create a global leader in telephony, Internet, cable, and data services.
The prelude to this shift was long and painful for AT&T. Facing competition from newcomers MCI and Sprint in the 1970s, AT&T realized that its core long distance service was rapidly becoming a commodity business and therefore sought to expand into what it saw as a growth area: computers. But its partnership with Olivetti and takeover of NCR proved disastrous. AT&T retrenched, unwinding the Olivetti deal and spinning off NCR.
For a time, AT&T's future again looked uncertain. CEO Robert Allen promised a radical overhaul of the company, but none of the benefits of a restructuring ever materialized. Soon Allen was out and Michael Armstrong came in. Under Armstrong's leadership, AT&T has set itself on a new course, transforming through acquisitions.
In June 1998, AT&T announced the $70 billion acquisition of TCI. It is this combination that is to transform AT&T. TCI's cable assets will be combined with AT&T's phone assets to allow the phone company to provide an integrated package of serviceslocal and long distance telephone service, Internet access, and cableover TCI's cable network. AT&T will be back at the cutting edge of technology.
Despite the scale of this move, AT&T pressed ahead with its acquisition spree. To make itself into a truly global player, in June 1998 AT&T announced the merger of its global operations with the international business of British Telecom. In April 1999, AT&T's $63 billion bid for cable operator MediaOne was accepted, moving the company closer to its goal of becoming a digital communications leader.
However, other telecom giants such as MCI WorldCom-Sprint and SBC-Ameritech have merged to challenge Ma Bell's leadership.
These deals, like others in the past, are part of a pattern of adapting to industrial change. Of course, the patterns are crude and imperfect. There is no clear road map.
However, there do seem to be elemental forces, Five Pistons, which drive the merger process. They are regulatory and political reform, technological change, fluctuations in financial markets, the role of leadership, and the drive for scale.
Regulatory and Political Change
Many of the most active M&A sectors over the past few yearsmedia and telecommunications, financial services, utilities, health carehave been stimulated by deregulation or other political turmoil.
Before deregulation, a number of industries owed their very existence to regulatory boundaries. In the financial services sector, for example, specific rules carved up the world into commercial banking, investment banking, insurance, mutual funds, credit unions, and so forth. These rules defined everything from the role of the local bank to that of the largest financial institution. Competition across the metaphysical regulatory boundaries was forbidden. However, lately these barriers have been relaxed, and in some cases completely removed. An Oklahoma land rush of deals has ensued, as companies struggle to make sense of this new competitive landscape.
Likewise, Congress literally rewrote the rules for the media and telecommunications businesses in the Telecommunications Reform Act of 1996. In the past, the various telecommunications players had defined realms. Local and long distance companies were not allowed to compete against each other; cable television companies generally had monopoly status. By contrast, the 1996 legislation eventually will allow local and long distance phone companies to compete in each other's markets. Cable companies also will be permitted to offer local service. Television and radio broadcasting companies may now own more stations. Though the regulations to implement this vision are currently tied up in litigation, the churning of the economic structure of the industry has already begun.
Technology creates new markets, introduces new competitors, has spurred globalization, and is intertwined with regulatory change. Changes in technology make old regulatory boundaries obsolete and sometimes silly. For example, the media and telecommunications business is an industry shaken by technological change and by regulatory reform. Technology has created industries like wireless telephony and satellite television, and promises a convergence of voice, video, and data transmission that will dissolve the boundaries between market participants. The emergence of thousands of new businesses in the last decade based on new technologies assures a heated merger pace in the future.
Financial fluctuations have a similar catalytic effect. A booming stock market encourages stock deals. A low market with low interest rates can spur cash deals after a period of high inflation in which the cost of hard assets has increased more rapidly than stock prices. In this environment, it may be cheaper to buy hard assets indirectly by purchasing companies on the stock market. Falling interest rates and available capital lubricate the process.
This was the story of the early 1980s. After a decade of relatively steep inflation, the replacement cost of assets had appreciated considerably. Yet, the stock market remained flat into the early part of the decade. As a result, a company's breakup value often exceeded its stock market value. The gap provided a powerful incentive for takeover entrepreneurs and financial buyers. On the other hand, tight money chokes the deal flow.
In the late 1990s, the opposite situation prevailed: the combination of financial fluctuations and technological change has created frothy stock market valuations in the technology and communications sectors, providing these companies with strong acquisition currencies. Sometimes, like the 1960s, companies with vibrant valuations can beat competing cash offers with stock, but the danger is that on some occasions the froth collapses like a soufflé.
Of course, corporate combinations do not occur in a mechanistic fashion. A human element is involvedthe man on horseback who leads a company to seminal change. Jack Welch at GE, Mike Armstrong at AT&T, Louis Gerstner at IBM, Philip Purcell at Dean Witter, make a difference, just as J.P. Morgan or Harold Geneen made the difference. As in political history, there have been arguments made about economic determinism, but people have an impact.
Scale matters, and bigger seems to mean better to most managers. Maybe it's critical mass, or technology and globalization, or integration, or sheer vanity and ego, but there is a natural imperative toward scale. However, just as some companies keep getting bigger, others shed their skin and became smaller. The imperative toward focus and simplicity is as strong as that for size. The two competing elements create a vortex of change. Generally, today size has momentum within an industry, and diversified large companies tend to divest. However, even focused companies shed subsized or underperforming units, and some conglomerates such as GE keep getting bigger.
Technology, deregulation, and globalization fuel one another to shape this global digital age with a profound impact on our lives. Yet, we are only on the brink.
Excerpted from BIG DEAL: 2000 and Beyond , by Bruce Wasserstein . Copyright (c) 1999 by Bruce Wasserstein . Reprinted by permission of Little, Brown and Company, New York, NY. All rights reserved.Back to top