Mergers and Acquisitions Return to Favor

Fresh from a string of disappointing financial results and burdened by sagging growth rates, consumer products makers may turn to a time-honored solution — mergers and acquisitions.

Many companies, such as Procter & Gamble, Unilever and Sara Lee have said they plan to focus on their core businesses and get rid of poorly performing assets.

Dial, struggling with weak financial results, says it’ll consider all options, leading many analysts to believe the company might consider a partial or a full sale.

Meanwhile, Gillette, itself an object of takeover speculation, recently entered into an agreement to sell its stationary business, while also abandoning a plan to find a buyer for its Braun appliance unit.

A Hard Year for Consumer Stocks Despite some takeover speculation, most consumer products stocks continue to suffer thanks to all the problems the companies have confronted this year. Higher raw material prices, a sagging Euro, decreasing inventories at retail stores and a highly intense, competitive environment among consumer goods manufacturers have made it a difficult year for household products makers.

Most analysts agree that scale is an advantage for consumer products manufacturers, as large retailers like Wal-Mart expand globally and look for suppliers that sell a wide variety of products and have well-developed marketing, advertising and distribution channels. But when and how the industry’s consolidation will occur is a subject for debate.

William Steele, an analyst with Banc of America Securities, says he expects significant M&A activity in the next few years, with larger companies getting rid of noncore brands, overseas companies merging with North American companies and middle-tier companies rethinking their core categories.

“This is not necessarily a piece that’s indicative of earnings acceleration; this is a survival strategy,” says Steele, whose firm has done underwriting for Dial. “Middle-tier companies are faced with two choices: lose market share or increase spending to maintain market share. The middle-tier suppliers have almost got to start joining up.”

The Candidates Are … Companies that are often bandied about as potential merger candidates in that category include Playtex, Alberto-Culver (maker of Alberto VO5 shampoo), Church & Dwight (maker of Arm & Hammer baking soda) and Dial. A Playtex spokeswoman declined to comment on merger speculation, while spokespeople from Dial and Church & Dwight didn’t return calls seeking comment.

An Alberto-Culver spokesman says his company is confident of its ability to make it alone. The maker of Static Guard had sales of $1.9 billion in 1999, a drop in the bucket compared to P&G’s $38.1 billion in fiscal 1999.

“We’re a 45-year-old company, and we’ve been hearing predictions of our demise for 44 of those years,” says spokesman Daniel Stone. “There’s something to be said for competitive tension in the market and companies that can bring you the best deals and the most creative advertising. When that number dwindles to two or three, there’s a tendency for that to stop.”

Dial’s management changeover recently revived speculation about the fate of the beleaguered soap maker.

“I think this industry continues to be ripe for consolidation, and I think over time Dial will go out that way,” says Franklin Morton, director of research at Chicago’s Ariel Capital, which owns and Dial and Clorox Co. “To me, it’s a when and not an if.”

Morton says he expects Dial to sell some of its noncore assets, such as its Armour Star canned meat unit or its specialty personal care lines like Freeman Cosmetics or Sarah Michaels. Some market watchers note that Armour Star would be a good fit for a company like Sara Lee, which makes Ball Park Franks and Jimmy Dean sausage and has made no secret about the fact that it’s on the prowl for acquisitions that would give its core products bigger scale.

The Logic of Finding Partners Though some analysts question the wisdom of a consumer products company being in the food business at all, and some, like P&G, have been shedding some noncore food assets, Banc of America’s Steele thinks consumer products companies would do well do link up with food companies.

“The channel’s the same, the marketing’s the same, the branding is the same. Is there really that much difference between selling soup and selling detergent?” asks Steele.

Others say a likely scenario will be for companies to decrease the number of products they offer and acquire smaller brands that can easily be marketed on a larger scale, much like Sara Lee is trying to do. P&G’s new CEO A.G. Lafley has also pledged to focus on core brands, leading many to think that further asset sales and acquisitions could be in store for the company.

“We’re only going to acquire a company when it make sense and when we see our core competencies adding value to that business,” says P&G spokeswoman Gretchen Briscoe. “We’re not just going to grow just for growth’s sake.”

In that same vein, most analysts say they aren’t expecting any mega-mergers among the larger players in the sector any time soon.

“With any mega-merger, companies look for growth more than just the cost savings that comes from eliminating redundancies,” said Jim Dormer, consumer products analyst at PaineWebber, which has done recent underwriting for Dial and P&G. “It’s difficult to see how the mega-merger can accomplish that in today’s environment.