U.S. M&A VOLUME NEARS $1 TRILLION AS PACE BUILDS: MONEY IS THERE FOR THE RIGHT DEAL BUT REGULATORS ARE WATCHING MORE CLOSELY

How long can the party last? That’s the question that echoed through investment bankers’ offices last week as this year’s volume of announced U.S. mergers and acquisitions drew within shouting distance of $1 trillion.

Low interest rates, high — though increasingly volatile — stock prices, corporate executives’ thirst to increase revenues and profits via acquisitions, and bulging buyout fund coffers helped the volume of M&A deals reach $973 billion through this year’s first half, already ahead of 1997’s record full-year total of $920 billion, according to Newark, N.J.-based Securities Data Co.

Financial services transactions accounted for 38% of the dollar volume in deals up from 32% in the year-earlier period, according to Mergerstat, a unit of Houlihan Lokey Howard & Zukin in Los Angeles, as banks, brokerages and insurers pursued acquisitions to increase their penetration and control of clients and assets.

A surge of megadeals, led by Travelers Group Inc.’s $70 billion offer for Citicorp, NationsBank Corp.’s $59 billion tender for BankAmerica Corp. and Norwest Corp.’s near-$34 billion bid for Wells Fargo & Co., led the second quarter’s frenetic pace.

“At the core is controlling financial assets,” says Steven Goulart, a managing director in the insurance industry group at Morgan Stanley Dean Witter & Co. in New York. “The regulatory framework is continuing to be chipped away such that everyone wants to achieve a substantial, sustainable competitive position in their own sector and find ways to access other sectors.”

no sign of a slowdown

Though the consolidation of the banking industry is well under way, activity in the insurance sector is still just getting started as many of the nation’s largest mutual insurance companies — from Prudential Insurance Co. of America and Metropolitan Life to Principal Mutual Life Insurance Co. — are converting to some form of public shareholder ownership to raise capital.

“Two years from now, there are going to be 15 to 20 large new competitors that will be in the same position as today’s stock insurance industry, and they will be interested in consolidation as well,” says Mr. Goulart.

But there are signs that some of the factors that have helped fuel the M&A frenzy are drawing increased scrutiny from government regulators. The Securities & Exchange Commission may limit the use of “pooling of interests” accounting — a consolidation technique that doesn’t require acquirers to subtract takeover premiums against future earnings. At the Federal Trade Commission, officials have stepped up enforcement of antitrust laws. And the Comptroller of the Currency continues to warn commercial banks to tighten their credit standards.

There also appears to be a growing consensus in corporate America that stock prices have gotten ahead of companies’ intrinsic values: The volume of announced share buyback plans in the second quarter fell to $30 billion — the lowest level since the last quarter of 1995, according to Securities Data.

But the volume of asset manager sales continues apace. An affiliate of Dutch banker Rabobank Group agreed to pay up to $575 million for New York-based Weiss Peck & Greer LLC, which manages $16 billion in assets. And Liberty Financial Cos. stepped off the sidelines and announced plans to acquire Portland’s Crabbe Huson Group Inc. for as much as $147.5 million, while Wilmington Trust Co. reached an agreement to buy 60% of Santa Monica, Calif.-based Roxbury Capital Management LLC, which manages $4 billion in assets.

“Deals are taking longer to get done,” observes Mr. Goulart. “At the price levels we’re seeing, people want to be very comfortable with their ability to realize appropriate returns.”

BILLION-DOLLAR DEALS

Buyer Seller Deal size ($m)

Travelers Group Inc. Citicorp $70,006

NationsBank Corp. BankAmerica Corp. 59,274

Norwest Corp. Wells Fargo & Co. 33,874

Banc One Corp. First Chicago NBD Corp. 28,924

Berkshire Hathaway Inc. General Re Corp. 21,174

Household International Inc. Beneficial Corp 7,216

Conseco Inc. Green Tree Financial Corp. 5,903

Astoria Financial Corp. Long Island Bancorp Inc. 1,667

Nationwide Mutual Insurance Co. Allied Group Inc. 1,626

Lincoln National Corp. Aetna Inc. (individual life business) 1,000