Investing in 1994: MERGERS
WHY TAKEOVER PROS ARE TAKING HEART
Make way for the next takeover gravy train. Yes, buyouts are back, and 1994 promises to be a bright year. Mellon Bank Corp.'s agreement to buy Dreyfus Corp. for $1.7 billion was the most recent deal in a long series of mergers and acquisitions announced in 1993. But junk-bond-financed deals are out: Stock swaps are more the style, with just a bit of cash thrown in.
And that's just super for the takeover pros, who think good money can still be made no matter how a merger or takeover is done. Buyout analysts have been scanning the screens for companies they believe could be alluring targets in the new assets-for-equity game, which is premised on strategic alliances.
E. Michael Metz, chief investment strategist at Oppenheimer & Co., thinks health care and pharmaceuticals will be at the core of the new wave of such alliances, in response to the Clinton health-reform package. Major drug companies will do more merging, he says, as will smaller operators, including health-maintenance organizations and hospital-management companies.
Among the chief targets Metz sees: Upjohn Co., which he thinks heads the shopping lists of Hoffman-La Roche, Hoechst, and Glaxo Holdings; Marion Merrell Dow; and Syntex, which has signed a marketing agreement with Procter & Gamble Co. for some of Syntex' products that are coming off patent. Metz notes that the Syntex pact with P&G is the first of its kind and could lead to a close link between the companies, which could include a buyout of Syntex.
DISCONTENTED COW. In the food industry, Metz says one company that seems to be waiting to be acquired is Borden Inc., whose stock slumped as low as 14 earlier in the year, down from 30.
He also thinks the financial sector will have some companies up for grabs: First Chicago Corp. and Rochester Community Savings Bank. First Chicago stock is trading at around its book value of 40, while most banks of its kind trade at 1 1/2 to 2 times book. With its diverse operations in institutional, credit-card, and retail banking, First Chicago could be very attractive to the likes of acquisitive Bank of New York, says Metz. On the other hand, Rochester Community had been the object of a buyout bid, which it eventually scuttled. Metz says he won't be surprised if the company sells itself at 25 vs. its current price of 15.
James Awad, president of Awad & Associates Asset Management in New York, expects some relatively unknown companies in the financial sector to draw buyout attention. His picks: North Fork Bancorp and Crestmont Financial Corp.
North Fork, whose stock trades on the Big Board at 11, is a bank holding company that serves affluent neighborhoods on Long Island, N.Y. New management, says Awad, has turned the company around. In a buyout, North Fork could be worth twice its book value and should attract a $25-a-share bid, he says. Crestmont Financial shares have been on the rise, leaping to 18, up from 10 in June. The company has been beefing up earnings and sprucing up the balance sheet. Crestmont should be worth 30 in a takeover, he estimates.
UPBEAT MUSIC. Awad has one takeover candidate in the entertainment industry: All American Communications Inc., a producer and distributor of recorded music and made-for-television movies. He thinks All American could be an attractive addition to a major entertainment company. Trading at $8 a share, All American's buyout value is $16, says Awad.
The entertainment field, says investment adviser Charles LaLoggia, will be a beehive of takeover activity, particularly for companies associated with gaming. His top choice: WMS Industries Inc., which controls some 80% of the world market for coin-operated pinball machines. WMS also owns major stakes in three hotel-casinos in Puerto Rico. Of more significance, says LaLoggia, is the nearly 25% stake in the company held by Sumner M. Redstone, chairman and majority shareholder of Viacom Inc. Redstone recently obtained clearance from the Federal Trade Commission to raise his stake to more than 25%.
The bottom line, according to the pros, is that the market seems fertile ground again for undervalued assets. The revived interest in mergers provides the evidence.LIKELY MERGER TARGETS
Stock Price Takeover
(Dec. 13) value
ALL AMERICAN $8 3/8 18
BORDEN 18 1/4 30
CRESTMONT FINANCIAL 19 1/4 30
FIRST CHICAGO 41 5/8 60
MARION MERRELL DOW 18 1/2 30
NORTH FORK BANCORP 11 5/8 20
ROCHESTER COMMUNITY 15 7/8 25
SYNTEX 16 35
UPJOHN 30 45
WMS INDUSTRIES 28 7/8 45
DATA: SURVEY OF MONEY MANAGERS AND ANALYSTS
Gene G. Marcial in New York