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The most troubling effect of the consolidations has been the creation of a huge and worrisome mountain of debt. In the past two years nearly $200 billion in stock has vanished from corporate treasuries and been replaced with IOUs that must be paid. By the end of the third quarter, American firms had built up $1.4 trillion in debt. In the same period corporate debt has increased more than 10% annually. These big borrowings, moreover, are part of a trend that has seen almost every sector of the U.S. economy become a rapidly growing debtor. From the $200 billion federal budget deficit to the $530 billion in outstanding consumer credit, America has become a buy-now, pay-later nation.
The corporate blue bloods that have been bought or agreed to be acquired in 1985 include many of the biggest names in U.S. business. In the food industry, Nabisco was consumed by R.J. Reynolds, General Foods fell prey to Philip Morris, and Beatrice is going private in a leveraged buyout, a defensive tactic against a takeover that allows executives to use borrowed money to acquire a firm. R.H. Macy, one of the most celebrated U.S. retailers, is putting together a similar plan. In entertainment, the American Broadcasting Co., whose treasures include Dynasty, is now the crown jewel of the Capital Cities Communications empire. In transportation, Corporate Raider Carl Icahn is flying off with TWA.
The corporate merger craze has taken some strange turns. Thwarted in a headline-making, five-month bid to take over CBS for $5.4 billion, Cable King Ted Turner consoled himself by buying a Hollywood studio instead. He paid $1.5 billion for MGM/UA Entertainment, whose library of 2,200 films includes such classics as Gone With the Wind and Singin' in the Rain.
CBS's plight, post-Turner, shows how escaping a raider can still leave a company seriously wounded. To evade Turner, CBS spent some $1 billion to buy back 20% of its shares. Now the company is selling profitable TV affiliates and its toy division to repay its debt. To further cut costs, CBS fired 74 news-division employees in a single "Thursday massacre" and offered early retirement to 2,000 people.
The acquisition binge, however, overjoys Wall Street, where it has helped drive stock prices to record highs. In recent weeks the Dow Jones industrial average has scaled one peak after another. Last week was the busiest in the history of the New York Stock Exchange, as the Dow jumped 58.03 points, to close at 1535.21. "The windfall profits from merger offers have sent a fever through the market," said Byron Wien, a Morgan Stanley analyst. In a recent study, the Goldman Sachs investment banking firm estimated that corporate takeovers have been responsible for nearly three-quarters of all stock gains since January 1984. Acquisitions have raised the value of target companies' shares an average of 30%. In one mighty leap, stock of Houston Natural Gas jumped from $46.865 to $67.125 in two days last May after an announcement that InterNorth was acquiring the pipeline company.