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The penalty for U.S. managers who choose to ignore the stock market's short- term imperative, though, is evident in Wall Street's takeover frenzy. Some 2,500 mergers and buyouts, worth more than $118 billion, have taken place so far this year, up from 2,463 deals worth $96 billion during the comparable period a year ago. As corporate raiders are well aware, institutional investors are more prone than other kinds of shareholders to sell during a raid, in order to gain a quick profit. They are also readier to hear arguments that focus on the value of corporations when broken into component assets rather than on their worth as ongoing enterprises. A poignant rendition of the managerial plight comes from Andrew Sigler, chairman of Stamford, Conn.-based Champion International, a $5 billion wood-products firm. Some 80% of Champion's stock is now held by institutions, Sigler believes. Says he: "The owners of our stocks come and go within hours. There is no one out there anymore who cares about our company as an institution. It's put tremendous pressure on short-term earnings. I'm helpless as a manager."
The predatory trends that have surfaced in the hit-and-run stock market have tended to feed on themselves. One sign of that is the phenomenal growth of the so-called junk-bond market, a $100 billion pool of high-risk, high- interest securities that have backed such takeover bids as Atlanta Broadcaster Ted Turner's $5 billion failed attempt to buy out CBS and Carl Icahn's successful $300 million takeover of TWA. The creation of such huge war chests for the use of takeover artists, among others, has heightened merger activity.
One by-product of the acquisition binge has been a surge in insider trading. Only in recent weeks has Wall Street begun to recover from its worst- ever scandal, when last spring Dennis Levine, a managing director of the Drexel Burnham Lambert investment firm, admitted to using insider tips on takeover bids to trade in the shares of 54 companies. According to the Securities and Exchange Commission, the deals earned him $12.6 million in illegal profits. Levine pleaded guilty to four criminal counts and awaits sentencing. Eventually, four other Wall Streeters were tainted in the same scandal.
The atmosphere of near panic that gripped insiders at the height of the investigation has subsided, but the probe seems to be having lasting effects. Surveys have shown a definite slowdown in the trading of stock of major corporate takeover targets immediately before the announcement of merger bids.
A more bewildering development is the array of complex, computer-assisted trading techniques that, in taking the stock exchanges by storm, have become a major cause of the market's extraordinary peaks and valleys. The most controversial is known as program trading, in which computers, for example, launch massive buy and sell orders for stocks and stock-index futures simultaneously (see following story).
The volume of shares involved in the wild cycles of program trading -- lots of more than 500,000 at a time for each trader are common -- has become the "tail that wags the dog," says Manhattan Investment Manager Soros. Observes Louis Holland, a partner in the Chicago investment firm of Hahn Holland & Grossman: "The little guy in the street is very concerned about all this perceived volatility. He doesn't think he has a chance."