Investing can be scary in time of mega-mergers


Through the airwaves, by rail or at the bank, U.S. companies in numerous industries are merging at a record pace. It's enough excitement to knock the wind out of the average investor.

There already has been $220 billion in merger and acquisition activity this year, 26 percent ahead of last year's pace, according to Securities Data Co.

There are reasons lightning keeps striking again and again.

Companies have a lot of cash on hand and the economy's modest pace makes it easier to acquire size than try to grow internally. There's also considerable talk of synergies as industries expand to meet the new demands of the coming century.

Deals like Walt Disney Co.'s $19 billion purchase of Capital Cities/ABC, Westinghouse Electric Corp.'s $5.4 billion acquisition of CBS Inc. and Union Pacific's $3.9 billion purchase of Southern Pacific illustrate there's a lot of money out there. But not all deals are as good as they sound.

"Not all combinations will prove beneficial," said Michael Metz, chief investment strategist for Oppenheimer & Co. "The individual investor must avoid emotional extremes, such as becoming too euphoric or too depressed about any group, and must know what he's buying."

The future isn't easy after mega-mergers.

"Time Warner's admission that it needs to simplify its business by separating into a content side and a distribution side supports the notion that being biggest isn't necessarily the right strategy," said Jill Krutick, entertainment analyst with Smith Barney. "Complexity comes with great size."

No industry is immune to takeovers, but some are ripe.

"There's an obvious need to grow through consolidation in banking, communications and broadcasting, and we'll see it in retailing as well in the months ahead," predicted Charles Clough, portfolio strategist for Merrill Lynch & Co.

For those keeping score, the biggest deals of all time are Kohlberg Kravis' acquisition of RJR Nabisco for $30.6 billion; the Disney-Cap Cities deal; AT&T;'s acquisition of McCaw Cellular for $18.9 billion; and Time Inc.'s acquisition of Warner Communications for $14.1 billion.

The greatest current focus -- at least until the next deal surfaces -- is on the media. Opinions are strong and diverse.

"Never in my 33 years as an analyst have I seen two days like those produced by the Disney-Cap Cities and Westinghouse-CBS deals," declared John Reidy, media analyst with Smith Barney. "My current recommendation is to hold CBS stock and buy Cap Cities." There may be another bid for CBS, Mr. Reidy believes. Barring that, even after a Westinghouse-CBS combination is completed, another suitor might surface to acquire that entity, he added.

"I'd have sold Cap Cities stock already if I held it, and I'd sell Disney on a short-term basis," advised Dennis McAlpine, media and entertainment analyst with Josephthal Lyon & Ross. "I wouldn't hold CBS stock waiting for some white knight to come charging up."

Speculation over potential moves by General Electric, owner of NBC, has been extensive. Mr. McAlpine expects GE would likely purchase Columbia/TriStar Motion Pictures -- if parent company Sony Corp. put it on the market.

"GE could simply sell NBC and get out of the business altogether, which I don't think it's going to do, or [it] could be comfortable as a medium-sized player," said Edward Atorino, media analyst with Dillon Read. "However, its large cash position also means it could go all out to buy Columbia/TriStar, Time Warner or even Turner Broadcasting, if it wished to do so."

If you find all this daunting, you aren't alone. Many investors, who also cut back volatile technology holdings, are staying out of the action.

For cautious investors seeking groups other than those with big run-ups, Mr. Metz recommends commodity producers International Paper Co., Inco Ltd. (in nickel production), Aluminum Co. of America and Du Pont Co. Also attractive are financial services, especially Merrill Lynch and American Express.

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