Mergers & Acquisitions

1
Buyer: Exxon Corp.
Seller: Mobil Corp.
Deal: $81.4 billion

Eighty-eight years after government trustbusters shattered John D. Rockefeller’s giant Standard Oil Co., two of its pieces rejoined to become the world’s largest petroleum and petrochemical company. Jaws dropped all over the business world when the deal was announced. It dwarfed the previous world-record merger and obliterated last year’s top Virginia deal, America Online Inc.’s $407 million purchase of Israeli company Mirabilis Ltd., creator of ICQ "chat" software.

Whenever an industry’s primary commodity has been under pressure for a prolonged period, "you tend to see efforts by key participants to cut costs and become more efficient," says Bill Tyson, a merger analyst with Scott & Stringfellow in Richmond.

The deal was also distinguished by the largest retail divestiture in U.S. regulatory history. After an 11-month review, the Federal Trade Commission ordered the sale of 2,431 Mobil and Exxon gas stations, including all Mobil stations in Virginia. Exxon Mobil (NYSE: XOM) has nine months to comply and must also sell a California refinery, several terminal operations, previously conflicting interests in pipelines, Irving, Texas-based Exxon’s jet turbine oil business, and Fairfax-based Mobil’s North American market share of paraffinic lubricant base oil.

The key for regulators is the concentration of the share of local and regional markets. "Regulators want to make sure fair competition is still the prevailing capital-markets influence," Tyson says. A major corporate move "should lower prices and benefit the consumer."

Despite all this, two weeks after the approval the company announced that benefits from the merger would be even greater than the two partners thought when they developed the plan. "We expect the [pre-tax] synergies directly attributable to the merger itself to amount to $3.8 billion annually," Chairman Lee Raymond told investors. The divestiture sales will be worth $4 billion to $5 billion, he said.

The company still owns more than 45,000 gas stations, about 21 billion barrels of proven oil reserves, and operations in more than 200 countries. Exxon Mobil’s first combined earnings report, released in January, showed a 34 percent rise in fourth-quarter earnings compared with the same period in 1998.

The scale of the deal may be astronomical, but the impact on small-business owners and other regional effects are real and tangible. About 1,700 Mobil stations on the East Coast are slated for sale to Tosco, and those owners and franchisees want to make sure their interests are protected.

Ron Harrell, owner of a Mobil station in Springfield, heads an organization representing those station operators. While not many of them objected to the merger, "they’re not sure why it had to happen," Harrell says. If the Tosco sale goes through, the stations would be re-branded as Union 76 sites within three to five years. The deal, a stock swap, closed Nov. 30.

Players: Exxon was assisted by J.P. Morgan & Co. as financial adviser and Davis, Polk & Wardwell as legal adviser. Goldman Sachs & Co. was Mobil’s financial adviser and Skadden, Arps, Slate, Meagher & Flom its legal adviser. The Federal Trade Commission appointed Deloitte Consulting as a hold-separate trustee.

Back to top

2
Buyer: America Online Inc.
Seller: Netscape Communications
Deal: $9.8 billion

Details: Last year, cyberspace’s 800-pound gorilla topped the list of Virginia acquirers for 1998 even as news outlets buzzed over a bigger coup set for 1999. Dulles-based AOL had already announced its plans to merge with Mountain View, Calif.-based Netscape, developer of one of the world’s two most widely used Internet browsers.

This year AOL, swelled with cash by Wall Street stock investors, has upstaged itself again with the biggest merger plan of all time. (If the Time Warner deal is approved, the mammoth merger will have to wait for next year’s roundup.) With Netscape, AOL gets NetCenter, an Internet "portal" that is designed to be the first page users see when they start up their browsers.

AOL also gets the names of 17 million registered users and technical expertise with browser-based e-commerce, according to its annual report. Mark Minasi, a Chesapeake-based writer on the Internet industry, sees it as part of the "misguided notion" that portals are important. He points out that the rate at which Internet users click banner ads to see advertisers’ sites — a pillar of income for commercial Web sites — has "dropped to zero" in the past 18 months or so.

But Tyson sees AOL’s acquisition strategy as part of a marketwide trend for companies to become "much more discriminating" in a search for more broad-based business. "AOL is slowly wanting to build broader channels and deeper channels in every direction ... to dominate the consumer on the Internet and provide every possible media-based need, whether it be content or access — basically locking us up as a consumer." The deal, a stock swap, closed March 17.

Players: AOL was assisted by Goldman Sachs as financial adviser and Skadden Arps as legal adviser. Netscape’s financial adviser was Morgan Stanley Dean Witter and Wilson Sonsini Goodrich & Rosati was its legal adviser.

Back to top

3
Buyer: General Dynamics Corp.
Seller: Gulfstream Aerospace
Deal: $4.77 billion

Details: General Dynamics has been a builder of diverse products for the Pentagon, but it hadn’t made aircraft for almost 10 years. Now the Falls Church company is back in the airplane business, and it has ventured deep into non-lethal territory in acquiring the Cadillac of civil aviation. Savannah, Ga.-based Gulf-stream’s latest model, the Gulfstream V, streaks at nearly nine-tenths the speed of sound for 6,500 nautical miles — far enough to go from Richmond to Riyadh, Saudi Arabia, without refueling. General Dynamics’ executives were attracted by the airplane maker’s reputation. "Gulfstream is a solid and well-run business, and an excellent strategic fit," Chairman and CEO Nicholas D. Chabraja said in a news release. "Quite simply, Gulfstream makes the best business aircraft in the world." The deal, both stock and cash, closed July 30.

Players: General Dynamics was assisted by Bear Stearns & Co. as financial adviser and Jenner & Block as legal adviser. Merrill Lynch & Co. was Gulfstream’s financial adviser and Fried Frank Harris Shriver & Jacobson its legal adviser. Deloitte & Touche served as independent auditor.

Back to top

4
Buyer: Cox Communications Inc.
Seller: Media General Inc.
Unit sold: Cable TV operations
Deal: $1.4 billion

Details: In an era of vertical and horizontal consolidation in the communications industry, the "single-system operator" is becoming more rare. So Media General of Richmond felt it made sense to sell its cable TV division, which provided service to a relatively limited area: Fairfax County, Fairfax city, Fredericks-burg, and parts of Stafford and Spotsylvania counties. It was the "right time for a sale," chairman and CEO J. Stewart Bryan III said in a news release. The buyer was Atlanta-based Cox, which has been aggressively expanding its cable network. It acquired systems serving more than a million customers in 1999 and seeks a million more in 2000. Media General’s cable operations drew the highest price per subscriber to date. Cox is one of the new breed of vertically integrated communications firms, providing local telephone service and Internet access. It also owns stakes in companies, such as the Discovery Channel, that produce content. This was the largest 1999 Virginia deal involving a method other than an all-stock transaction. Media General, which owns Virginia Business magazine, applied the proceeds to help pay off existing bank debt. Media General made a good move by "monetizing a very valuable asset," Tyson says. The cash deal closed Oct. 1.

Players: Cox was assisted by Merrill Lynch as financial adviser and Dow Lohnes & Albertson as legal advisor. Media General’s financial adviser was Wasserstein Perella Group.

Back to top

5
Buyer: Gannett Co.
Seller: Newsquest Plc
Deal: $1.36 billion

Details: Arlington-based Gannett, whose flagship USA Today is the epitome of modern print journalism, got a piece of the past with this acquisition. Surrey, England-based Newsquest’s stable of publications includes the 310-year-old Berrow’s Worcester Journal, the world’s oldest surviving newspaper. But England’s largest publisher of regional newspapers isn’t just a "dead tree" news purveyor. Its network of online community sites (i.e., "This Is Lancashire," "This Is Brighton") provides local news and guides to local life in the vein of Digital City or Sidewalk/Citysearch. Now a division of Gannett, Newsquest operates 11 daily newspapers, 50 paid-subscription and 119 free weeklies, and it claims a readership of 9.8 million. The deal closed July 26.

Players: Gannett was assisted by PricewaterhouseCoopers as financial adviser and Nixon Peabody as legal adviser. Newsquest’s financial adviser was Merrill Lynch and Simpson, Thacher & Bartlett its legal adviser.

Back to top

6
Buyer: Global Telesystems Group
Seller: Esprit Telecom Group Plc
Deal: $1.29 billion

Details: Esprit of Reading, England, which operates in seven European countries, brings expertise in sales, marketing and customer service into a mix with McLean-based Global Telesystems’ expertise in running a large telecommunications system. Esprit also links its long-distance network with a growing web of high-powered fiber-optic nodes that could eventually interconnect all the major cities in Europe. Global Telesystems has big plans in Europe: no less than to become the continent’s premier provider of business communications. The $250 million acquisition of Norway-based NetSource in 1998 was a tune-up for the Esprit deal. Investors were excited enough to give Global’s stock an $8-a-share boost to $50.25 within two days of the announcement. The deal, a stock swap, closed March 5.

Players: Global Telesystems was assisted by Bear Stearns as financial adviser and Sherman & Sterling as legal adviser. Esprit’s financial adviser was Lehman Brothers and Simpson, Thacher & Bartlett was its legal adviser.

Back to top

7
Buyer: SuperValu Inc.
Seller: Richfood Holdings Inc.
Deal: $893 million

Details: SuperValu, based in Eden Prairie, Minn., the nation’s largest food wholesaler, is strategically expanding its retail arm. It added about $1.8 billion in annual retail sales with Mechanicsville-based Richfood, owners of Shoppers Food Warehouse, Farm Fresh and Metro grocery stores. SuperValu credited the acquisition with a major role in its record quarterly earnings in late 1999. As of this writing, it had not closed any of the Richfood stores and had not announced any plans to do so. SuperValu was naturally drawn to the operational expertise of Richfood, which showed a virtuosic ability to tinker when it turned around the flagging Farm Fresh chain, acquired in 1997, says Scott & Stringfellow’s Tyson. The deal closed Aug. 31.

Players: SuperValu was assisted by Merrill Lynch as financial adviser and Skadden Arps as legal adviser. Richfood’s financial adviser was Donaldson, Lufkin & Jenrette and Hunton & Williams its legal adviser. Ernst & Young acted as independent auditor.

Back to top

8
Buyer: AES Corp.
Seller: Cilcorp Inc.
Deal: $884 million

Details: AES of Arlington, which generates and distributes electric power in 18 countries, is well-known for its conglomeration of overseas power concerns. But in 1999 it initiated almost as many acquisitions in the United States as it did outside the country. Peoria, Ill.-based Cilcorp, owner of central Illinois’ electric and gas utility, provides "a significant start in the important Midwest market," AES president and CEO Dennis W. Bakke said in a news release. The deal closed Oct. 18 and was partly financed by issuance of senior notes secured by the Bank of New York.

Players: AES was assisted by Credit Suisse First Boston as financial adviser and Skadden Arps as legal adviser. Salomon Smith Barney was Cilcorp’s financial adviser and Winthrop, Stimson, Putnam & Roberts its legal adviser.

Back to top

9
Buyer: PSINet Inc.
Seller: Transaction Network Services Inc.
Deal: $721 million

Details: Like all large ISPs, Herndon-based PSINet sees its customers as a potential market for e-commerce, so it’s no surprise that it acquired a leading carrier of credit-card transaction data. Reston-based Transaction can now use PSINet’s infrastructure to increase the capacity and speed of its data transport. Both companies had already extended their networks beyond North America to Europe and the Pacific Rim. The deal closed Nov. 23.

Players: PSINet was assisted by Donaldson, Lufkin & Jenrette as financial adviser and Nixon Peabody as legal adviser. Transaction Network Services was assisted by Morgan Stanley Dean Witter as financial adviser and Arent Fox Kintner Plotkin & Kahn as legal adviser.

Back to top

10
Buyer: Nextlink Communications
Seller: WNP Communications Inc.
Deal: $695 million

Details: WNP of Earlysville is a child of the digital age, a company formed by investors solely to purchase licenses at a 1998 Federal Communications Com-mission auction. WNP snagged the largest chunk of the spectrum for sale, spending a mere $186.9 million. Then Bellevue, Wash.-based Nextlink, which was looking for "yet another broadband network option" for its customers, handed WNP’s founders a 271 percent payoff. The deal closed April 27.

Players: Nextlink was assisted by Willkie, Farr & Gallagher as legal adviser. WNP’s legal adviser was Edwards & Angell.

Back to top

This report was compiled by Robert Greiner with assistance from Houlian Lokey’s Mergerstat.