Why businesses are once again keen to merge

The supersizing of American business is accelerating.

Corporations are embarking on what is being called a "new wave" of mergers. Although this may result in tens of thousands of layoffs, it may also mean that the improved efficiencies are passed on to consumers. It's too early to say how large the wave will be compared with the late 1980s, when hostile mergers dominated the news. But they are likely to become more common, since US companies have more than $1 trillion in cash.

"What we are seeing is that as you get late in the economic cycle, companies look for alternative ways of growing their business," says Fred Dickson, chief market strategist at D.A. Davidson. "Companies loaded with cash have to put it to work or face screaming shareholders."

The latest two examples of the merger boom are two giant couplings: Last week, Procter & Gamble Co. said it would buy Gillette for $57 billion, and in a deal that may be formally announced this week, SBC Communications is in merger discussions with AT&T. In addition, telecom companies Sprint and Nextel announced a $35 billion marriage last month.

The mergers are expected to help the stock market, which has been lagging since the beginning of the year. "It shows CEOs have confidence in the next two to three years because they wouldn't be making these acquisitions if they thought we were going into a downturn," says Mr. Dickson of D.A. Davidson, which is based in Great Falls, Mont.

The merger boom may get some fuel from the American Jobs Creation Act, which gives US companies a one-time repatriation of dividends from overseas if they will be used to create domestic jobs, go into research and development or capital expansion, or be used in acquisitions. So far, four pharmaceutical companies alone have announced they will bring back $50 billion.

"No doubt it will be a stimulus for mergers and acquisitions and the markets," says David Kotok, chief investment officer at Cumberland Advisors Inc. in Vineland, N.J. "It could result in $200 [billion] to $300 billion coming back, and companies get to keep over 90 percent of it."

This may not be the only money arriving from overseas that's used for mergers. With the US dollar down against the euro and yen, analysts expect foreign corporations to begin to look to the US for growth by acquisition. "A lot of money is sitting offshore," says Mr. Dickson. "We see the Chinese computer company Lenovo trying to buy IBM's PC division. We might expect to see a lot more of these kinds of deals."

The mergers are also increasing because of competition from abroad, says Anthony Chan, managing director at JPMorgan Fleming Asset Management in Columbus, Ohio. "The race for efficiency is on," he says. "It's driven by globalization pressures: China has such low labor costs that US companies have to be able to compete by improving efficiency."

In some of the new mergers, consumers may benefit from cost savings, as the greater efficiencies lower the cost of goods. For example, in the P&G merger, the combined companies are expected to shed as many as 6,000 jobs according to some news reports. As costs are lowered, some of the savings might get passed on to large retailers that carry the merged company's products. "People who shop at Wal-Mart might see some prices drop," says Christopher Brown, vice president and portfolio manager at Pax World Balanced Fund, which manages $1.45 billion.

P&G is already a consumer-products giant with such brands as Pampers, Tide, Folgers, Charmin, Crest, and Pringles. The Cincinnati-based company prides itself on its marketing ability. Gillette, which is based in Boston, includes such brands as Oral-B and Duracell. "There's not a lot of overlap," says Mr. Brown, adding that the companies will save a lot of money by using the same distribution channels.

If the merger is completed, it might not bode well for competitors, such as Unilever or Clorox. "The new company will be so huge it will have the size and scale to do some damage to their competition," says Brown, whose fund includes Gillette shares. "It may force some others to merge to better compete."

If the SBC and AT&T merger is completed, it would help SBC become more of a national brand. AT&T is only a shadow of itself, but most Americans still have warm feelings for the "Ma Bell" image. In fact, while AT&T has been shrinking, SBC has been growing.

SBC, based in San Antonio, owns part of Cingular, which merged with AT&T Wireless recently. That new combination is in the process of shedding 6,000 jobs.

Such mergers are relatively common at the end of an economic cycle, after several years of economic growth and stimulus, say analysts. In the late 1990s, some of the huge energy mergers were completed. The end of the 1980s also saw a round of acquisitions.

But Dickson points out that some of the mergers in the past haven't worked too well because of different corporate cultures. "Sometimes it takes years to get through that friction," he says.