The Year Of The Deal

Dec. 21, 2004
Fourth-annual ranking shaken by merger frenzy.

To call them marriages made in heaven would be an exaggeration, but the list of companies that have joined in fiscal matrimony, or that have announced "engagements" since the publication of last year's IndustryWeek 1000, is certainly growing longer by the day. One need look no further than the top-ranking company on our list. What for three years running was home to General Motors Corp. is now the property of DaimlerChrysler AG, the result of the marriage of Daimler-Benz AG and Chrysler Corp. Also married: British Petroleum Co. PLC and Amoco Corp.; Alcoa Inc. and Alumax Inc.; Compaq Computer Corp. and Digital Equipment Corp. Engaged: Exxon Corp. and Mobil Corp.; Rhone-Poulenc SA and Hoechst AG; BP Amoco PLC and Atlantic Richfield Co. More rings are certain to be exchanged in 1999. Industry restructuring, increased competition, and the need to lower costs have driven this nuptial activity. Keeping track of all of these mergers and acquisitions is not easy, but it can be done, especially with this year's fourth annual IndustryWeek 1000 ranking. Within the 36 countries represented on our list of the world's leading publicly held manufacturing companies based on revenues, there are 99 new companies. Although some of those new companies appear for the first time because of merger and acquisition activity, many do not. For some, it has been growth brought about by innovation, a thriving economy, an initial public offering, or even changes in financial reporting that have influenced their placement. For companies that have been on the list but have fallen, industry and recessionary pressures around the globe have slowed sales growth and cut profits. IW 1000 companies in the oil industry, for example, averaged a 27% decrease in profits last year. Revenues at White Plains, N.Y.-based Texaco Inc., ranked No. 42 this year and No. 20 last year, fell from $45.2 billion in 1997 to $30.9 billion in 1998. Net income dropped from $2.6 billion to $549 million. Barry Brunsman, a senior manager with the global energy practice at Deloitte Consulting, Chicago, says the downturn in oil prices last year led to cost-cutting throughout the industry. "It was in that context that mergers started to happen," he says. By simply spinning off part of its business, an IW 1000 company also could have dropped in the ranking. Milwaukee-based Rockwell International, ranked No. 225 in 1998, fell to No. 277 this year after spinning off its automotive-components business into a new public company called Meritor Automotive Inc. in September 1997. On Jan. 1 of this year -- a move that will affect its position on next year's list -- the company announced it had spun off its Semiconductor Systems business, now known as Conexant Systems Inc., to shareowners. At a glance, the IW 1000 quickly shows which companies experienced substantial increases in revenues and profits from 1997 to 1998. The list also shows which companies did not. Because revenue performance is not the only indicator of a company's financial success, IW also details each firm's record in areas ranging from earnings per share to return on equity. The Urge To Merge Industry watchers do need a scorecard to keep track of the companies that have changed ownership during the last year. There have been myriad reasons for such activity. Larraine Segil, a partner at the Lared Group, Los Angeles, says currency gained through the stock market has enabled companies to make acquisitions. Overcapacity in some industries, especially the oil industry, also has prompted companies such as British Petroleum to acquire one-time competitors Amoco and Atlantic Richfield. "Companies are taking advantage of cross-border opportunities," says Segil, author of Intelligent Business Alliances (1996, Times Business). "You need to have a global presence." Consolidation within countries also is taking place. "You're seeing consolidation within Europe itself," she says. "Companies are becoming regional players." Mergers also are happening more often in low-tech industries where the motivation for cost savings has been greater. A tight labor market is another reason for the shifting ownership. Larry Horwitz, senior industry economist with Primark Decision Economics, Boston, says that if a company cannot find the people with the proper technology skills, it may just go out and buy a company that has employees with those skills. Often, those acquired companies are much smaller and are the sites of the most dynamic product innovations. Although merger-and-acquisition activity is not expected to slow down in 1999, Segil says a major correction in the stock market could put a halt to it. "For the next few months, you will see more acquisitions of companies in Asia by U.S. and European companies," she says. One recent decision could fuel merger activity in the coming year. In the U.S., the Financial Standards Accounting Board recently voted to eliminate the "pooling of interests" accounting rule by Jan. 1, 2001. When two companies merge, this rule allows companies to simply add their balance sheets together, line by line, making it difficult to tell what premium the acquiring firm actually paid. Using purchase accounting, the new standard that takes effect in 2001, the buying company will have to reveal the premium paid for the assets and write it off against earnings over several years. U.S. Maintains Dominance In addition to mergers and acquisitions or individual company performance, the IW 1000 clearly shows the continuing strength of manufacturing around the world and the wealth it creates. IW 1000 companies in the U.S., the most-represented country on the list with 334 companies, generated $2.8 trillion in revenues in 1998. U.S. companies in the IndustryWeek 1000 averaged 4.3% growth from 1997 to 1998. On last year's list, U.S. companies averaged 8.6% revenue growth from 1996 to 1997. Among the other top wealth-producing countries, companies averaged the following revenue increases (or decreases) from 1997 to 1998: Japan, 1.1%; Germany, 7.8%; France, 5.9%; and Great Britain, -1.7%. Primark's Horwitz says U.S.-based firms, whose business has been primarily domestic, did very well during the last year because costs have stayed low. "Those companies dependent on exports have had a more difficult time," says Horwitz. He adds that the U.S. economy will continue to be the envy of the world for the coming year, even though gross domestic product growth may slow to 3%. Consumer spending in the U.S., as well as capital spending, is expected to decrease, while investments in technology by companies will continue to increase. "Tech spending has been booming because of the Y2K bubble," says Horwitz. "Tech spending is looked upon as a way to improve productivity and gain control of costs." Business for Europe-based companies is expected to remain comparatively slow in 1999, while countries in Asia are expected to show some economic progress. "We're seeing Thailand and Korea showing some good signs," says Horwitz. "Government policies there are bearing fruit. Japan is only at the beginning of the process of digging out, even though their financial markets have recovered." Numerous Japanese firms bounced back last year after troublesome times in 1997. Of the 256 Japanese companies in the IndustryWeek 1000, 24 companies experienced revenue growth of at least 10%. Leading Japanese companies in revenue growth were Mitsui Chemicals Inc., 70.5%; Advantest Corp., 59.7%; Bandai Co. Ltd., 43.9%; Nintendo Co. Ltd., 27.8%; and Fanuc Ltd., 25.6%. Automotive Industry Tops List Companies in the IW 1000 producing motor vehicles and parts generated more wealth than any other industry on the list. As a group, the 66 companies in that industry produced $1.27 trillion in revenues in 1998. That industry grew 5% from 1997 to 1998. Other top wealth-producing industries had the following results: electronic/electric equipment, 5%; petroleum/coal products, -14%; food, 4%; and chemicals, 0%. Among industries with at least 10 companies represented in the IW 1000, the computer-software industry registered the highest growth percentage: 14%. Revenue-growth leaders from 1997 to 1998 in each of these top five industries include: motor vehicles and parts, Federal-Mogul Corp., 147.4%; electronic/electric equipment, Flextronics International Ltd., 62.4%; petroleum/coal, KN Energy Inc., 104.6%; food, Diageo PLC, 244.8%; and chemicals, Clariant AG, 47%.

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