Exxon, Buffett Stir Takeover Pot, for Good or Bad: David Pauly

Wall Street’s mergers and acquisitions machine is recovering from its recession doldrums, raising the old question of whether the takeovers investment banks foster do anything more than make companies bigger and harder to manage. Schlumberger Ltd. this week said it would buy oil-field services rival Smith International Inc. for about $11 billion and, according to Bloomberg News, Thermo Fisher Scientific Inc. is offering about $6 billion for Millipore Corp., adding biotechnology customers to its market for laboratory equipment.

There already have been some eye-popping deals. Exxon Mobil Corp., the biggest U.S. oil company, in December offered about $31 billion for XTO Energy Inc., to add the target company’s huge reserves of natural gas.

Warren Buffett’s Berkshire Hathaway Inc. on Feb. 12 completed its $26.7 billion offer for full control of Burlington Northern Santa Fe Corp., which vies with Union Pacific Corp. as the nation’s biggest railroad.

Takeovers are good for Goldman Sachs Group Inc. and Citigroup Inc., which currently top the 2010 list of U.S. merger advisers. It’s good too if corporate executives have renewed confidence in the economy -- though acquisitions usually destroy jobs rather than create them.

The spectacle of hostile takeovers such as Kraft Foods Inc.’s contested acquisition of British candy maker Cadbury Plc might spark investor interest in the stock market.

Bad-mouthing

A similar battle for control was brewing this week. Airgas Inc., the largest distributor of industrial gases in the U.S., blew off an unsolicited $5.1 billion bid from Air Products & Chemicals Inc. “We are concerned about Air Products’ ability to manage the business,” said Airgas Chief Executive Officer Peter McCausland, who owns 9.34 percent of his company’s shares.

Once the merger parade accelerates, investors will buy shares of other oil, chemical, food and railroad companies betting they will also be taken over.

CEOs and their Wall Street advisers always rationalize their deals -- never mentioning such things as empire-building or increased pay for running bigger companies.

Schlumberger says it needs Smith International’s drill bits added to its drilling, logging and seismic businesses to compete as the search for crude oil moves into more difficult areas both on land and at sea.

There’s enough similarity in the companies’ products that some will have to be divested to satisfy government antitrust officials.

Power Moves

Electric utility FirstEnergy Corp.’s plan to buy Allegheny Energy Inc. for $4.7 billion in stock gives the buyer access to Allegheny’s cheaper power and gives the seller access to capital for expansion. It had better work: FirstEnergy offered a 32 percent premium for Allegheny shares.

Walgreen Co. is the biggest U.S. drugstore chain but it’s nowhere in New York City. Last week, it offered $618 million for Duane Reade Holdings Inc., which has 257 stores in the largest pharmacy market in the country.

While Walgreen used to open new stores on its own, buying Duane Reade was a quick entry into New York and the seller, leveraged buyout firm Oak Hill Capital Partners, no doubt was eager to get out. Walgreen’s offer was less than the $680 million the LBO outfit paid for the New York stores in 2004.

Unfortunately, there’s no historical record to praise takeovers or to condemn them. Though studies show the stocks of buyers tend to decline in the short run, it’s impossible to say how merged companies would have done if they hadn’t combined.

There are obvious successes, like Exxon’s acquisition of Mobil, and clear disasters such as Time Warner Inc. and what’s now AOL Inc.

Takeovers are part of the corporate psyche in any case. The best thing about the latest batch is that they indicate the economy is approaching normalcy. Whether it’s shooting free throws in the last seconds of a basketball game or risking millions on a new factory, confidence is the key.

(David Pauly is a columnist for Bloomberg News. Opinions expressed are his.)

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To contact the writer of this column: David Pauly in Fort Myers, Florida at dpauly@bloomberg.net

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