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Firms like Drexel Burnham Lambert, which specialize in helping takeover artists float junk bonds, are another powerful new Wall Street force. Junk bonds are corporate IOUs issued by companies without established credit records, and are therefore considered risky. In the past two years some $27 billion in junk bonds have been issued. Both raiders and corporate executives who wish to take their companies private use them to raise the needed money. "Junk bonds completely changed the nature of the game," says Michael Dingman, president of Allied-Signal, a high-tech giant formed last summer in the friendly merger of the two manufacturing concerns.
Michel Bergerac, the ousted chairman of Revlon, would surely agree. Revlon spent nearly five months trying to elude Pantry Pride, a Florida supermarket chain that is about one-third Revlon's size, but the cosmetics king was finally acquired for $2.7 billion in November. Though Bergerac's pain at seeing his company bought was eased by a $36 million parting settlement, or golden parachute, he still talks like a bitter man. "The whole thing was crazy," he says. "Here we built a great American corporation. Then through this process the stock ended up in the hands of arbitragers, who forced the sale of the company. And junk-bond financing made it all possible."
Takeover artists, arbitragers, junk bonds and all the other elements of merger finance have created a mood of high uncertainty in corporations. Rather than planning new products or considering new markets, many executives are spending their time looking around at whom they might take over or who may try to take them over. In a less frenetic period, RCA might not have been so eager to find a merger partner. The motto of these executives could be borrowed from the legendary baseball pitcher Satchel Paige: "Don't look back. Something might be gaining on you."
The consolidation craze has created opportunities for sudden Croesus-style riches. For aiding Pantry Pride in its fight for Revlon, financial advisers and lawyers stand to gain more than $100 million. The winners include Drexel Burnham, which sold the junk bonds to finance the deal and is earning an estimated $60 million.
Institutional investors are also big gainers. Some 80% of trading on the stock market is done by institutions. Their major concern is to get the highest possible return on investments, and a quick corporate takeover is often the way. Institutions are often eager to sell out to arbitragers for large profits once a merger fight begins. To such investors, notes one veteran Wall Street watcher, "a corporation is no longer a company, it's just a deal."
The mammoth gains that megamergers create have aroused suspicions that some players may be getting advance word of pending deals and profiting from inside information. For example, ABC stock jumped from $66 a share to $105 earlier this year in the month before the announcement of its acquisition by Capital Cities. General Foods rose from $70 a share to $120 before it was bought by Philip Morris. Last Wednesday the price of RCA stock jumped $10.375, to $63.50, hours before the merger was announced.