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With drop, megamergers lose some shine

Much of the recent rush among companies to merge, acquire and combine has been fueled by the enormous buying power of stock as the overall market soared. Companies whose names were barely recognizable a few months ago _ like WorldCom Inc. and Starwood Lodging Trust _ have been able to bid billions of dollars to buy huge corporations like MCI Communications and ITT.

But the unraveling of the stock market Monday may cause a lot of these deals to come apart at the seams.

"Everything becomes unglued," said Tom Burnett, the founder of Merger Insight, an institutional research service.

About half the roughly $750-billion in mergers announced so far this year involve stock, reaching a record $350.8-billion, said Securities Data Co.

Now, transactions that seemed close to being done deals are suddenly open to question. Buyers, worried about the value of their own stock, have become concerned about paying too much. Sellers are looking askance at being paid in stocks whose value is declining.

Take WorldCom's audacious bid for MCI. The offer, originally valued at $41.50 a share in WorldCom stock, which has had a blistering performance since 1989, looked impressive compared with GTE's competing all-cash offer of $40. But if its stock stays at its closing price Monday, $31 a share, WorldCom's offer will be worth only $37.85 a share. The deal requires WorldCom to pay more if the price of its stock stays under $34 a share.

Cash takes on greater buying power once the perception grows that the stocks being used to make these purchases can lose value, creating the need for more stock or other kinds of financial wizardry. "The banks will finance GTE," said Guy Wyser-Pratte, an arbitrager in New York. "The market may not necessarily finance WorldCom."

To be sure, stock prices gyrate, and WorldCom, whose shares traded at a once-lofty $39.87{ less than a month ago, may see its stock soar once again.

"We don't focus on the day-to-day change in the stock price," said Josh Howell, a senior vice president for WorldCom. "In a storm, everybody gets a little wet." But, he said, the company believes that it is still on course in its discussions with MCI.

What about Starwood Lodging's proposed embrace of ITT Corp., which had shunned the overtures of Hilton Hotels Corp.? Starwood is offering $82 a share for ITT, $67 of which would be in newly issued shares of Starwood stock. Hilton's offer of $70, half of which is cash, was dismissed by some as being clearly less attractive, but it could start to look good to ITT investors. After all, ITT's shares, which closed at $71.93} Monday, down $2.68}, are now trading at less than $2 above Hilton's bid.

"Our cash and stock offer for ITT is still on the table," a Hilton spokesman said. "We intend to keep it on the table."

Other deals that could come under pressure are bank mergers, including NationsBank Corp. and Jacksonville-based Barnett Banks Inc. Some mergers have provisions that allow a company to drop out under certain circumstances, including a sharp drop in a stock.

"The market drop will have no effect on our acquisition of Barnett," said Lynn Drury, a spokeswoman for NationsBank, who said such a walk-away provision was nowhere near being set off.

Companies' ability to raise money by selling stock also could be hurt by the stock market's weakness. Eighteen initial public offerings, including AMF Bowling and Beringer Wine, are slated for this week, said Linda Killian of Renaissance Capital. "The ability of these companies to do initial public offerings is dependent on the health of the equity market." The decision to go forward and risk getting a lower price is made by the underwriter and the company involved, she said. "Then it's a matter of how badly do you want your deal done."

The gyrations in the stock market are unlikely to cause all these deals to come apart, Wyser-Pratte, the arbitrager, said. "When you have a systemic shock of this type, you normally get a moment of hesitation," he said. "It's just pure uncertainty. If the deals make sense, they will go through."

Still, dealmakers likely will be sharpening their pencils over the possibility of having to redo their calculations. The current market drop makes many price assumptions moving targets. "If there's enough of a drop, the deals must be renegotiated," Wyser-Pratte said.

And few stocks were spared from the market's overall beating yesterday. "My whole screen is red," said Alfred F. Kugel, an investment strategist for Stein Roe & Farnham in Chicago. "I think what we're seeing is a mindless clobbering of the market," he said.

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