- The Washington Times - Wednesday, December 26, 2001

The number of corporate mergers and acquisitions dropped off by almost 37 percent this year, but a handful of big players still were looking to consolidate.
Comcast Corp.'s plans to acquire AT&T; Broadband, revealed last week, easily marked the largest announced merger of 2001 a year that saw merger and acquisition activity slow with the economy and the rate of corporate earnings.
"It's a very difficult credit environment. When the credit markets are tight, it has a direct effect on valuations," said Jon Mahan, a Legg Mason analyst who works on mergers. "The recession, as it slowly rolled across, had an effect on all industries and those companies were thinking of buying or selling."
The number of mergers in the United States this year, according to preliminary data from Thomson Financial Securities, will be about 7,000, down from 10,990 in 2000. Analysts say last year's record numbers were caused mainly by heavy consolidation among young, cash-rich technology firms. But over the course of the year, many of those companies failed or were floating along on piles of unattractive debt. Many companies once willing to sell are now unable to garner attractive prices. Those willing to buy might find bargains but have struggled to find companies that can offer anything more than debt and promises.
Companies won't acquire other businesses unless they can "make a direct contribution to the bottom line," said Richard Peterson, chief marketing strategist for Thomson Financial. "So go earnings, so goes the [merger] activity."
Companies that have planned to merge are running into headaches that don't exist during better business climates, analysts say, and many deals are falling through or taking longer to finalize. Due diligence, the time in which the companies' attorneys, advisers and investors can look into the records and details of a potential deal, is taking longer. Companies are more meticulous in their negotiations. Case in point: Dynegy's 11th-hour decision last month to back out of its planned acquisition of the now-bankrupt Enron Corp. after uncovering multibillion-dollar holes in the energy trader's accounting books.
"I can certainly tell you that the deals we're working on are taking twice as long to close," Mr. Mahan said. "And as you go further into the process, more can go wrong."
Several of the largest announced mergers this year have yet to close. Nearly all were announced in the second half of 2001 and would be unlikely to be finalized by the end of the year in any business climate, analysts said, but they have hit some roadblocks.
Hewlett-Packard announced in September it would buy Compaq Computer for about $25 billion in stock. But shareholder support has been lukewarm at best, and the heirs of the two companies are opposed to the deal. Earlier in the year, General Electric Co. failed in its $42 billion bid for Honeywell International Inc. after the European Union blocked it, citing concerns over competition.
The economic fallout of the September 11 terrorist attacks stymied many acquisition plans and reshaped others. Falls Church-based General Dynamics Corp. had been in what many considered prime position to buy Newport News Shipbuilding with an all-cash bid. But a run-up of defense stocks after the attacks caused a rival stock-and-cash bid from Los Angeles-based Northrop Grumman to pass the General Dynamics offer in value. Northrop Grumman announced it would buy Newport News in October, after the Pentagon rejected General Dynamics' bid.
Meanwhile, many firms looking to merge are facing common obstacles. Echostar Communications plans to buy Hughes Electronics Systems, owner of DirecTV, in a deal that would merge the two largest providers of satellite television. It is a move that has been under scrutiny from consumer groups and Congress.
The same scrutiny is expected to be put on the Comcast/AT&T; Broadband deal, which would create the largest cable company in the United States, with 40 percent market share.

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