A Week of Mergers

A company might merge to get new products, more customers or bigger market power. Or sometimes just to survive.

A spate of deals this week in industries ranging from newspapers to prescription drugs marked defensive moves by companies to increase their chances of staying alive rather than offensive salvos against rivals.

Analysts pointed to newspaper chain McClatchy Co.'s $4.5 billion agreement to buy Knight-Ridder Inc. (KRI), as well as Capital One Financial Corp.'s (COF) $14.6 billion pact to buy North Fork Bancorp Inc. and several pharmaceutical deals.

"If you look at those mergers, each of them — for their own individual reasons — were necessary for the survival of those companies," said Geoff Long of law firm Bracewell & Giuliani.

In the case of Knight-Ridder, the newspaper industry faces cost pressures, shrinking advertising and competition from the Internet and television.

Capital One, meanwhile, wanted to reduce its dependence on the volatile credit card market and gain a foothold in New York. With North Fork, it will get a company that built itself through acquisitions to become one of the 20 largest U.S. banks. Together, Capital One and North Fork would be the No. 8 U.S. bank.

"Every deal has a little bit of survival and a little bit of growth in it ... but I think there was a very defensive component to these," said Long, who is based in Houston and focuses on corporate law.

"In banking, like in a lot of industries, size seems to be the key," he said. "Capital One was doing that deal to avoid being acquired."

Less than a year ago, analysts had viewed Capital One as a potential takeover target for banks seeking a steady stream of cash flow and a new outlet for customers.

This week, the pharmaceutical industry also saw deals by companies clamoring for greater heft to keep pace with larger rivals. Watson Pharmaceuticals Inc. agreed to buy Andrx Corp. for $1.9 billion to bulk up its generic drug business.

In Germany, drug and chemical group Merck KGaA launched a $17.4 billion cash bid for domestic rival Schering AG as it searched for new products and ways to cut costs. Schering balked, calling the offer too low.

Merck's offer could unintentionally beget a different merger forged out of need: Schering is now considering making acquisitions of its own to protect itself from the unsolicited bid, sources close to the company's supervisory board told Reuters.

"Schering runs a risk of rushing into a bad marriage to thwart Merck rather than holding an auction to get the best possible partner and price," said one health care investment banker, who requested anonymity.

Regardless of the motivation behind acquisitions, dealmakers said the best combinations are those that take place within the same industry.

Conversely, some "transformational deals," where companies try to diversify by investing in completely different businesses, have flopped.

One textbook case is Internet company America Online's $160 billion acquisition of publishing and entertainment conglomerate Time Warner Inc. (TWX) in 2001. The deal had been heralded as a marriage of old and new media that would change the way entertainment and information is distributed.

But the combined company suffered amid sluggish subscriber growth at AOL, federal probes into the unit's accounting practices and a management shake-up. AOL actually ended up losing ground to Yahoo Inc. and Google Inc. in the online advertising market.

"I think the most the successful mergers are mergers in similar industries because they tend to have more cost synergies," said Lee LeBrun, UBS AG's co-head of mergers and acquisitions for the Americas.

"It's easier for companies to leverage each other's competitive advantages and not overestimate synergies, which can lead to overpaying," LeBrun said.

AT&T Inc. (T), for example, aims to squeeze $18 billion in cost savings and benefits from its planned $65 billion acquisition of local telephone company BellSouth Corp. (BLS). That deal will bring the ownership of the companies' joint venture, Cingular Wireless, under one roof.

AT&T also plans to cut 10,000 jobs, integrate telephone networks and technology systems, reduce advertising expenses, and gain pricing leverage with vendors.

"AT&T did that deal because they could, because it made sense, because they can squeeze a lot of synergies," said one telecommunications banker who requested anonymity. "They didn't do it because they had to."

Last year, Qwest Communications International Inc.

spent three months unsuccessfully trying to wrest MCI Inc. away from rival suitor Verizon Communications Inc. (VZ).

Qwest, struggling at the time with shrinking revenues and $17 billion in debt, had wanted MCI for its long-distance traffic and its lucrative business customers. But the bid failed, even though it was higher than Verizon's.

AT&T "is buying (BellSouth) out of strength," the telecom banker said, "while Qwest was trying to buy out of weakness."