MPR: Who's Next?

Who's Next?
By Bill Catlin
June 14, 1999

Honeywell's takeover by AlliedSignal, announced a week ago, brought to five the number of major corporate headquarters Minnesota has lost in the last year and a half. So, who's next? Speculation has buzzed around several local firms, but it's anybody's guess.

SOARING STOCK PRICES MAY BE the biggest factor in takeovers. Share prices remain high and a CEO sitting atop a lofty share price has lots of buying power. Takeovers are often paid for with the stock of the company that's buying. But, as Mark Hoonsbeen also points out, companies are also flush with cash. Hoonsbeen manages a mutual fund for IAI in Minneapolis, where he has been an active investor in regional stocks. He says that cash may be used for mergers.

Hoonsbeen: Most boards of directors are not in favor of management sitting on cash balances and so they are actually asked to deploy that cash one way or the other. At this point in the cycle, with large cash balances, companies are more inclined to look at acquisitions whether they be strategic or tactical acquisitions to try to grow their businesses.

And there may be a deadline. Hoonsbeen also says accounting rules that affect some mergers are changing at the end of the year and that may prompt companies to act while existing rules remain in effect.

But there are also larger forces at work.

Deregulation in the telecommunications and utilities industries is pushing firms together. Northern States Power recently merged with New Century Energies of Colorado. The recent U.S. West-Global Crossing merger followed mega-combinations involving AT&T and MCI.

Before that, the financial-services industry saw a wave of giant combinations, including the merger of Wells Fargo and Minneapolis-based Norwest. U.S. Bancorp Piper Jaffray stock broker Richard Remnick says mergers in banking may accelerate. He says banks have been focused on dealing with the year 2000 computer problem.

Remnick: And that's probably dampened the immediate enthusiasm for going ahead with mergers, but we're reaching a point in the year when any mergers won't be completed until after the year 2000, in any event. So you may see this fall, kind of the renewal of merger activity.

The urge to merge has cut across all three sectors of the financial-services industry, banking, insurance and securities, all of which are important in Minnesota. First Bank took over an Oregon-based bank to become U.S. Bancorp, and bought local brokerage Piper Jaffray. The St. Paul Companies bought a competitor last year, USF&G, of Baltimore. Analysts say both US Bancorp and the St. Paul Companies seem more likely to remain on the buying side of deals, but in the current environment they could become targets as well.

Minneapolis-based Reliastar has been mentioned in the financial press as a potential target ,either for banks seeking the stable fees of a life insurer or from overseas institutions looking for a foothold in the lucrative U.S. market.

General Mills, has also been the subject of past speculation that it might be gobbled up by Nestle, its partner in a joint venture, but no deal has emerged.

Officials at 3M, which has had difficulty because of the economic trouble in Asia, say size is no guarantee a company can maintain its independence, but company officials and some analysts say 3M would not be an easy fit for other companies.

Professor Alfred Marcus of the University of Minnesota's Carlson School of Management says several economic forces can fuel mergers. Falling prices may push companies to combine and cut costs through economies of scale. Competition from abroad, and technological change can also prompt corporate couplings. And, Marcus says, don't forget the CEO's ego and personal bottom line.

Marcus: It's very profitable for the top management team to be part of these deals and suddenly be in the position of being the CEO or part of the top management team of a much larger enterprise. They can command much higher salaries and other perks involved in that.

And Marcus says while communities may grieve the loss of a major corporate headquarters like Honeywell or Norwest, consolidation can be good for consumers when it allows companies to contain or reduce prices.

Marcus: In an advanced industrial nation like the United States, this is certainly not universal, but the average person can afford so much many goods and services than ever before were possible because of the enormous efficiencies, part of the reason is because of the enormous efficiencies that are possible because of large enterprises.

Mark Hoonsbeen of IAI worries about where the next giants will come from. He points out that in the 1990s, the Twin Cities has lacked the rising corporate stars that, in years past, fueled the area's reputation as an engine of technological innovation; companies like Cray Research and Control Data.

Hoonsbeen: If we continue to generate new, strong, growing companies, our area will continue to be vibrant, and we can stand to lose some of our large corporations, because we have other companies coming up to fill up the job losses, and to establish themselves as the new market-dominant companies of the future.

Hoonsbeen also points out that merger mania has been a two-way street for Minnesota. Though the state has lost headquarters, several of those companies have boosted their Minnesota employment. Minnesota companies have completed several acquisitions of their own, most notably Medtronic, which bought five companies last year, to the tune of $8 billion. The company says those acquisitions will help add some 4,000 jobs to its Minnesota payroll.

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