Cover Story -- Mergers
EVERYBODY'S TALKING TAKEOVER
Companies have loads of cash--so figure on some big buyouts
No matter how you slice it, takeovers are on a streak, getting hotter as the stock market has run up to record highs. "They'll accelerate and will likely continue to boil over in the next 6 to 12 months," says E. Michael Metz, investment strategist at Oppenheimer & Co. That's what he forecast last year for 1997, and he was on the money. Pressure on companies to broaden their sales bases and widen their profit margins will continue, he notes.
Other buyout experts agree. They figure there will not only be plenty of deals but they'll also be huge. Witness reports that AT&T is discussing a possible $50 billion merger with SBS Communications Inc. SBS itself acquired, only last March, another Bell company--Pacific Telesis Group. This is the biggest deal ever, and Metz thinks it suggests the size of proposed buyouts or mergers will no longer be a hindrance.
The stock market's unrelenting advance has helped the large companies continue their acquisition binge. Cash hasn't been scarce either. Companies have hoards of cash, and banks have been only too willing to provide highly lucrative loans for takeover deals.
Where will the next round of buyout deals come from? The juiciest takeover bets are to be found mainly in the technology, banks, basic materials (metals, chemicals, and paper), telecommunications, insurance, and the securities industries (table), say the experts.
In technology, Metz is convinced that Digital Equipment Corp. has become a ripe target for Compaq Computer Corp. He notes that the lawsuit and countersuit between Digital and Intel Corp. have made Digital more vulnerable to a takeover, since the battle will hamper Digital's business and hurt its stock. Metz figures that Digital, now at 36--it traded as high as 57 a year ago--is worth $50 a share in a buyout.
NETS AND PHONES. Computer networking stocks have been on a roll of late, partly because of persistent takeover talk. Whispers about buyouts have increased in the aftermath of 3Com's recent bid to buy U.S. Robotics and Ascend Communications' offer to acquire Cascade Communications. The stock of one networking company, Bay Networks Inc., a maker of high-speed routers and wide-area-network access devices, jumped from 15 in March to 25. One California money manager, who has been accumulating shares of Bay Networks, is convinced that giant Lucent Technologies Inc., the AT&T spin-off, is interested in the company. Bay Networks could fetch 35 in a buyout.
In telecommunications, Glenayre Technologies Inc. is being eyeballed by Swedish telecom giant L.M. Ericsson, according to a New York hedge fund manager. Glenayre, a leading supplier of telecom equipment and related software for paging and wireless communications companies, has been a stock on fire since late April, when it was trading at 8. It has leaped to 15 on heavy volume, partly because of recurring takeover speculation.
That prompted the company to adopt an antitakeover poison pill on May 23, fueling even more takeover speculation. Interest in Glenayre has been stoked in part by the current consolidation going on in the telephone business. The smaller outfits have now become prize targets, says the hedge fund pro.
Among such smaller companies, little-known Group Long Distance, a reseller of long-distance and other communications services to small businesses, is a ripe takeover candidate, says analyst Richard J. Paone of L.T. Lawrence & Co., a New York investment firm.
The company that's rumored to be interested: Tel-Save Holdings Co., which already owns a 9% stake. Group Long Distance, which has been growing at a fast clip, buys its time from Tel-Save, AT&T's largest long-distance wholesaler. Group Long Distance's sales have grown from $9.4 million in the year ended April, 1995, to an estimated $23 million in fiscal 1997. And earnings before interest, taxes, depreciation, and amortization have risen from $471,000 to $2.1 million during the same period.
"Bigger telephone companies are looking to gobble up companies of Group Long Distance's size," notes Paone, as they seek to spread their wings. "Whether or not it wants to, Tel-Save may have to acquire Group Long Distance lest someone else buys it and runs its traffic through some other companies like Sprint, MCI Communications, or WorldCom," says Paone. Trading at 4 1/4, Group Long Distance is worth as much as 11, says Paone. He expects the company to earn 33 cents a share in 1998.
DRUGSTORE DEAL? Investment adviser Charles LaLoggia, who has been on a roll in spotting takeover candidates, is betting on Genovese Drug Stores Inc., which operates 122 stores in the New York City area. "Genovese is an ideal takeover target for one of the large drugstore companies seeking to expand through acquisitions in the Northeast," says LaLoggia, who edits the newsletter Special Situation Report. He figures that Genovese, trading at 15, is worth 25 in a buyout, based on recent deals in the consolidating drugstore industry. He has reason to be confident: Twelve of his 15 takeover picks have received takeover bids in the past 15 months.
In financial services, one company that is expected to be in the rumor mill soon is Aames Financial Corp., which provides home-equity loans in 23 states, mainly to people who have significant equity in their homes but who have "subprime," or poor, credit ratings.
One New York money manager argues that an acquisition-hungry franchiser and financing company is hot on the trail of Aames. One reason: Aames's shares have dropped sharply since mid-March, partly because it disappointed some analysts on earnings.
Beaten down from 32 in mid-March to 14 on June 2, the stock has attracted the attention of bargain hunters. One of them: the Fesbach brothers, better known on Wall Street in the 1980s for their aggressive short-selling of stocks. But this time, the Fesbachs are bullish on Aames--with or without a takeover.
A year from now, the play on the Street may be somewhere else. But for now, takeovers are where the action--and the payoff--is.By Gene Marcial in New YorkReturn to top