The Global 1000

The Year of the Deal

The market is applauding the turnaround at France's Alcatel, but its hard-driving chief executive, Serge Tchuruk, isn't about to sit back yet. Investors are so pleased with Tchuruk's efforts to restructure the once troubled telecom equipment maker that they have nearly doubled its market value--to $34.9 billion--in the past year. Tchuruk's goal, though, is to make Alcatel a world leader in new technology and equipment for Internet communications. So in early June, he took a big step, using his fat share price to buy Texas-based DSC Communications Corp. in a $4.4 billion stock deal.

Expect to see many more moves like Tchuruk's in the coming age of the global deal. Alcatel's absorption of the American telecom company places it among a growing list of deals in the global consolidation sweepstakes. Others include Daimler and Chrysler, Citicorp and Travelers, Northern Telecom and Bay Networks (table, page 48). This year's Global 1000 has more significance than ever. In the past, market value was considered a measure of corporate success, or just plain bigness. But this year, the list also is a measure of the new merger power among the world's corporate elite. It wasn't too long ago that pundits were asking: "Is your company too big?" Now it is: "Is your company big enough?"

EURO CLOUT. This year's list shows clearly that the Americans and Europeans are the ones with the clout. The Global 1000, using data compiled by Geneva-based Morgan Stanley Capital International, ranks some 2,700 companies in 22 countries by market capitalization as of May 29. U.S. companies, as a group, have seen their stock prices rise some 37% in the year ended on May 29. The U.S. now accounts for nearly half of the world's leading companies--a stunning 480--up 33 from last year. Wal-Mart Stores Inc. made it into the list's Top10 for the first time in five years, while Pfizer Inc. vaulted from No.22 to No.7. General Electric Co. held its own as No.1, with a market value of $271.6 billion.

Meanwhile, European companies make up more than a third of the list--350 companies, up by 54. The share prices of German companies have climbed 42%, and French share prices are up a surprising 60%. Coming in at No.3--and top European company--is Royal Dutch/Shell Group, with a market value of $195.7 billion. Novartis and Roche Holdings also ranked among the top 15 companies.

If the trend of European and American dominance continues to play out, it's the Asians--particularly the Japanese-- who stand to lose. Reflecting the seemingly never-ending travail in the region, Japanese companies saw their share prices shrink by 23% in U.S. dollar terms, and some 8% in yen terms. Some 66 Japanese companies have dropped off the Global 1000 altogether. Combined, the 116 survivors now account for just 8.5% of the total market value of all 1,000 outfits tallied. This paltry share is more than half of last year's cut for Japan, and it now lags behind the 10.7% share for Britain, which can claim 115 companies on the list, up 20 from 1997. Even giant Canon is now worth less than two-thirds of Xerox Corp.

Since the Global 1000 ranks market value in dollar terms, currency plays a role in who's up and who's down. But this year's shifts are driven largely by surging markets in Europe and the U.S., by investors' approval of industrial restructuring on the Continent, and by merger mania everywhere.

TAKING STOCK. All three forces powered the historic merger of Daimler Benz and Chrysler Corp. With its market value up 31% since last year, to $52.1 billion, placing it No.66 on the BUSINESS WEEK list, Daimler had the financial wherewithal to approach America's No.3 auto maker, Chrysler, as a serious buyer. Chrysler's market capitalization was $35.9 billion, making it the world's 99th-largest company. By paying stock, Daimler CEO Jurgen Schrempp was able to finance the deal without taking on debt.

The result: a global auto giant offering everything from luxury autos to sport-utility vehicles geared for drivers of the 21st century. Now, Daimler may buy all or part of Nissan Motor Co.'s $207 million stake in Nissan Diesel, Japan's fourth-largest truckmaker. Nissan, Japan's No.2 auto maker, is burdened by $46 billion in debt--five times its equity--after expanding aggressively in Europe and the U.S. just as domestic sales slumped. The company lost $100 million in the fiscal year ended in March.

With bull markets in the U.S. and Europe still raging, stock deals such as Daimler's are likely to keep driving global consolidation. By yearend, the U.S. alone will have seen nearly $1.3 trillion in mergers, predicts Martin Sikora, who edits the Mergers & Acquisitions journal for Securities Data Publishing. The majority of these will be stock deals. "With the equity markets where they are, stock is the currency to use," says Steven Koch, co-chief of global mergers and acquisitions for Credit Suisse First Boston.

In industries ranging from autos to telecom, analysts predict the merger craze will continue. As they prepare for the launch of monetary union in January, European companies are likely to be especially active. Rumors are swirling that French auto maker Renault is apt to be a merger candidate. It vaulted up the Global 1000 list from No.708 to No.328, partly on expectations of a deal--perhaps an alliance with Ford Motor Co. In pharmaceuticals, London-based Zeneca Group PLC is constantly mentioned as a target, perhaps of Sweden's Astra. The market value of Zeneca, No.90, is up 34%, to $38.5 billion.

Finance is another area sizzling with activity. Towering above all finance megamergers, of course, is the Travelers-Citicorp deal, for $72.6 billion in stock. The new Citigroup will boast assets of $700 billion and a market cap of about $134 billion. With their stunning embrace, Travelers Group CEO Sanford I. Weill and Citicorp's John S. Reed led a number of other financial tie-ups in the U.S.: NationsBank and BankAmerica, and Wells Fargo and Norwest, just to name two. In Europe, banking consolidation now is gathering pace as relatively inefficient institutions geared to national markets face the prospect of fierce cross-border competition.

In some places, though, nationalism still interferes with the forces of competition. Consider the battle to take over Belgium's Generale de Banque, the country's largest. When Fortis, another Belgian banking group, offered $10.7 billion in stock to buy up Generale, the Netherlands' expansionist ABN-Amro Holding upped the offer by 16%, to $12.4 billion. But Generale's shareholders didn't want to be taken over by a Dutch rival--even for more money. Instead, it nudged Fortis to offer more than $13.1 billion in stock and cash, and a new Belgian banking champion was formed. H. Rodgin Cohen, a New York lawyer specializing in bank mergers, says cross-border bank linkups will still be problematic, but "barriers are breaking down," he believes.

ASIAN FLU. In Japan, longtime barriers to foreign investors are now tumbling under its Big Bang liberalization. Foreign players are salivating at the prospect of tapping into $9 trillion in Japanese household financial assets. Merrill Lynch & Co., which jumped 77 notches, to No.123, is set to become the first foreign broker able to serve Japanese investors with a nationwide retail network. Merrill is reopening, under its own name, 33 branch offices of Yamaichi Securities Co., which collapsed last year. And it has launched training centers for Japanese brokers. In another groundbreaking development, Travelers recently paid $1.6 billion for 25% of Nikko Securities Co.

Until recently, such linkups would have been impossible for Japanese institutions. But with the Japanese banking system in peril, more tieups with stronger U.S. or European partners seem likely. Predicts Michael J. Biondi, CEO of Wasserstein Perella & Co., a global mergers firm: "The problems have gotten so severe that the gradualist approach [to Japan's financial sector woes] may not suffice."

Like their counterparts in banking and industry, Japanese tech-based companies also have taken a plunge in this year's Global 1000. Toshiba Corp., for example, dropped from No.162 to No.307. Hurt by weak personal computer sales at home, Toshiba's net earnings fell by 89%, to $52 million, last year.

Elsewhere in the world, however, investors continue to be dazzled by technology. The market capitalization of Microsoft Corp. jumped 41%, to $209 billion, making that company the second most valuable in the world, after GE. U.S.-based Dell Computer Corp. soared from No.177 to No.63. In Europe, exciting new products helped Finnish cell-phone superstar Nokia impress investors and glide from No.166 to No.87. And SAP, the German-based software giant, has seen its orders explode as companies hustle to install systems to cope with both the euro and the Year 2000 bug.

SAP now ranks as No.61 in the world, up from No.180 last year. With his $55.6 billion in market cap, SAP CEO Hasso Plattner has plenty of money to buy up talent. Instead of megadeals, Plattner buys niche outfits with technologies to plug into SAP's massive, companywide software systems. In recent months, for example, he has picked up for an undisclosed sum Israel's OFEK-tech Software Industries Ltd., which specializes in warehouse logistics management. And SAP has increased its stake in Germany's Kiefer & Veittinger, which produces programs to automate company sales forces. The company plans to list its shares on the New York Stock Exchange on Aug. 3.

In telecommunications, meanwhile, the mergers-and-acquisitions action is wilder. From L.M. Ericsson in Sweden to Northern Telecom in Canada, telecommunications companies are in a race for partners that will help them create digital systems capable of carrying voice and data via mobile phones, satellites, or cable. The decision of AT&T and cable provider Tele-Communications Inc. to team up--in a stock deal worth $48 billion--is likely to spur further consolidation. "What the world doesn't need is more complexity," explains C. Michael Armstrong, chairman and CEO of AT&T. Combining phone and cable companies makes sense, "so that we can deliver all the communications service from a single connection from one company," says Armstrong.

NO DEAL. Of course, as the global deal engine roars along, there is no guarantee that all cross-border mergers--or even those in single markets--will work out. Last winter's failed $100 billion tieup of Glaxo Wellcome PLC and SmithKline Beecham PLC is a case in point. Despite their agreement to work hand in hand, Glaxo chief Richard Sykes and SmithKline's Jan Leschly could not overcome their differences. In spite of what they said, analysts point out, both men wanted to be top dog.

Antitrust worries also are delaying some pending deals. European Union officials, for example, held up WorldCom Inc.'s $37 billion purchase of MCI Communications Corp. until MCI agreed to sell its major Net businesses. EU Competition Commissioner Karel van Miert has vowed to scrutinize all deals that could affect competition in Europe, even when the companies aren't based in the EU.

Still, it seems likely that corporations most attuned to the forces of global competition will continue to look for new strategic opportunities--and, thus, new partners or acquisitions. European companies hoping to pay for acquisitions in the U.S. with stock will have to follow in the footsteps of such companies as Daimler and Alcatel, whose accounts meet American standards and whose stock is traded in the U.S.

More companies are doing just that. Executives from German chemicals maker BASF--No.137 on the BUSINESS WEEK list--were recently in New York to test the waters for a New York Stock Exchange listing. "It's a certificate of quality," says BASF Chief Executive Jurgen Strube. But it also would allow the company to pursue American takeover targets--and pay in stock. "In terms of opening up strategic options, it would be a must," he says. If more CEOs start thinking like Strube, the age of the global deal may be just beginning.