In 1998, major mergers were the dominant story
List includes Mobil-Exxon, Daimler-Chrysler, AT&T-TCI, Citicorp-Travelers, Shaws-Star
By Jerry Ackerman, Globe Staff, 12/27/98
y any measure, corporate mergers and acquisitions dominated business news in 1998. An eye-popping $4.98 trillion worth of deals were logged by Securities Data Co. by last week. That was triple the $1.6 trillion record set in 1997.
The number of deals, 11,002 as of last Wednesday, may fall short of the 11,156 record of 1997.
But their scale, topped by the $86.4 billion joining of Mobil Corp. and Exxon Corp., is changing the national and global business landscape.
Chrysler Corp. and Daimler-Benz AG; a parade of banking linkups led by Citicorp's merger with Travelers Group Inc.; America Online Inc.'s bid for Netscape Corp.: The list is long.
Some of the biggest plays involved telecommunications, with nuptials announced between AT&T Corp. and Tele-Communications Inc.; MCI Communications Corp. and WorldCom; Bell Atlantic Corp. and GTE Corp.; and a three-way combo of SBC Communications Inc., Pacific Telesis Group, and Ameritech Corp.
Layoffs were in store and antitrust issues abounded. But profits drove the deals. ''I have no interest in being the largest company in the Fortune 500,'' Mobil chairman Lucio Noto said in announcing the Mobil-Exxon deal. ''Revenues mean nothing to me. What counts is profit and what counts is the return that we together can generate for our shareholders, and that's what this marriage is about.''
MARKET MADNESS
Volatility around the world
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Financial markets worldwide were shaken to their roots as Russia's economy collapsed and Brazil's threatened to follow.
Coming on top of Asia's financial problems, these setbacks sent the Dow Jones industrial average down 20 percent between July 17 and the end of September.
The plunge stopped only after three consecutive cuts in short-term interest rates by the Federal Reserve Board. With investor confidence restored, the market recovered - and then, ignoring political turmoil and war against Iraq, kept on climbing to close at 9217.99 Thursday.
The impacts of those global problems reached far. Teradyne Corp., Eaton Corp., and PRI Automation Inc. were among dozens of Massachusetts semiconductor industry suppliers that laid off workers. Boston-based mutual funds scaled back plans to enter the Japanese market. BankBoston Corp. closed its offices in Japan, the Philippines, Taiwan, and India - but said it fared well in Brazil, where customers sought safety in US banks.
Economists warned of more rocky times, however. Japan has been slow to carry out banking reforms; Brazil's setbacks are likely to dampen the entire Latin American economy; and no early solution is in sight for Russia's deepening woes.
COMPAQ-DIGITAL DEAL
Digital Equipment Corp., never able to fully recover after it missed out on the desktop computer revolution, called it quits and sold out in January to rival Compaq Computer Corp. for $9.15 billion - a record sum for the computer industry.
Digital had long been the flagship of the Massachusetts high-technology industry, its early days under founder Ken Olsen in an old mill in Maynard a legend. After years of losses, Digital was making thin profits but still faced a fight for survival.
With the merger came 17,000 layoffs or retirements, equal to about one-third of Digital's total payroll. Most rank-and-file workers got 39 weeks pay. Chairman and chief executive Robert B. Palmer got a $18.45 million severance package.
Massachusetts also lost other computer-industry leaders in 1998. Two of them went to Ascend Communications Inc. of Alameda, Calif. - Cascade Communications Corp. of Westford, which makes high-speed data communications equipment, sold for $3.7 billion in stock, and Stratus Computer Inc. of Marlborough, a leader in fault-tolerant computers, sold in an $843 million stock swap.
POWER SWITCH
No major business in Massachusetts underwent as dramatic a change this year as electric utilities. The stage was set by a state deregulation law that took effect March 1, ending monopoly control of power supplies and delivering an immediate 10 percent discount on consumers' electric bills.
Carrying out their part of the scheme, the major utilities - the New England Electric System, parent of the Massachusetts Electric Co., and Commonwealth Energy Systems Inc. - sold their generating assets to companies who now must price the output of those plants competitively.
Sithe Industries, the US subsidiary of a French company, paid $536 million for BEC Energy's oil- and gas-fired power plants, while Entergy Corp. of Louisiana picked up BEC's Pilgrim nuclear plant in Plymouth for $80 million.
Those deals paled, though, next to the consolidation that followed. BEC, declaring that it wants to triple its customer base to 2 million by the end of 2000, made its first move by buying Commonwealth Energy's electric distribution system, which reaches from Cambridge to New Bedford to Martha's Vineyard and the tip of Cape Cod. BEC paid $950 million.
A week later, New England Electric System announced the sale of all its transmission and distribution assets, including a customer base of more than 1 million in Massachusetts, Rhode Island, and New Hampshire, to National Grid System Ltd., the primary provider of electric transmission in England and Wales. The price: $3.2 billion in cash.
CHANGING OF THE GUARD
Raytheon goes outside for leadership
(Globe Staff / Frank O'Brien)
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For the first time in its 76-year history, Raytheon Co. reached outside to hire a new president, chairman, and chief executive, Daniel P. Burnham, 52, formerly vice president of another major aerospace company, AlliedSignal Corp.
As the fifth person to lead Raytheon, Burnham succeeds Dennis J. Picard, 66, who retired.
The two are considered a study in contrasts. The tight-lipped Picard rose through the company's engineering and production ranks and, as chief executive since 1991, oversaw acquisitions that made Raytheon the third-largest US defense company.
Burnham, a Midwesterner who has performed in amateur rodeos and likes fast cars, aims to foster a more open culture in which employees will be encouraged to take part in productivity and quality control.
Burnham is seen as a management and finance specialist - skills Raytheon needs to deal with its growth. Arriving in midsummer, Burnham's first high-profile task was an October announcement that 14,000 jobs, or 16 percent of the work force, would be cut by the end of 1999. The move will leave Raytheon with 115,000 employees, 15,000 of them in Massachusetts.
Describing the round of layoffs as necessary to keep Raytheon competitive, Burnham told the Globe: ''We hope and believe it's the last one like this.''
REVOLUTIONARY RAZOR
Every seven years or so, Gillette Co. introduces a ''revolutionary'' new product to sustain sales and profits. The latest big offering from the Boston-based giant is the Mach3, billed as the world's first three-blade razor.
Representing a $1 billion investment for Gillette, the Mach3 hit the shelves of US retailers over the summer to much marketing fanfare.
Gillette could use a blockbuster. Economic problems in Asia, Russia, and Latin America have hurt US multinationals, and in Gillette's case those troubles caused the company to disappoint Wall Street in its earnings for the first time in many years.
The company also announced a round of layoffs to improve its financial position, although it seemed Boston would escape the heaviest cuts.
In any case, much is riding on the Mach3. Early signs are that men are embracing the pricey razor with the same enthusiasm with which they previously snapped up the Sensor and other Gillette razor innovations. But whether the Mach3 is truly a worldwide smash hit won't be known until some time in 1999.
E-COMMERCE CASHES IN
After 1998, you'll never hear another skeptical word about the future of Internet retailing. Consumers at last set aside their fears of credit-card fraud and shoddy merchandise, and began spending real money on line.
Burgeoning sales of cheap personal computers have transformed the Internet from an engineer's playground into a hangout for millions of average citizens. There are now PCs in about half of all American homes, and, according to Nua Internet Surveys, an Irish market research firm, between 70 million and 80 million of us are on the Internet.
Get that many Americans together anywhere, and you can certainly sell them something. Sure enough, a survey taken in November found that 65 percent of America's Internet users have made purchases on line, up from only 47 percent in April. And 72 percent of Internet users planned to do at least some of their holiday shopping on line.
No surprise, then, that Jupiter Communications, the market research firm in New York, predicted $2.3 billion in on-line holiday sales this year. That's more than twice the 1997 level. And as sales of home PCs remain strong, the Internet retailing boom has only begun.
MICROSOFT ON TRIAL
Bill Gates takes the stand
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Bill Gates, the world's richest man, claimed imperfect memory and nitpicked government lawyers during lengthy federal court proceedings in an effort to prevent antitrust regulators from dismantling his beloved Microsoft Corp. It didn't work, but a surprising business deal among a group of Microsoft's key rivals may yet succeed in helping Gates and Co. wriggle off the hook.
In May, Microsoft and the Justice Department met head-on in a Washington, D.C., courtroom. Government attorneys claim that Microsoft uses unfair tactics to preserve its monopoly in operating system software for desktop computers, and to expand that monopoly into other areas of the software business.
So far, court watchers think Microsoft is getting the worst of it. The government scored point after point by featuring the testimony of executives from rival companies, who say Microsoft repeatedly threatened and bullied them to do things Bill's way. Microsoft's cause wasn't helped when a videotape of Gates's deposition was played. Gates came across as arrogant and evasive; some of his answers roused laughter from Judge Thomas Penfield Jackson, and even from some Microsoft attorneys.
Worse was to come when a federal judge in California ordered Microsoft to stop offering a version of the Java computing system not entirely compatible with the one offered by Java's inventor, Sun Microsystems Inc. Microsoft had licensed Java from Sun but wanted to make what it called improvements. Sun argued those changes were intended to make Java work properly only on machines running Microsoft operating systems. In issuing an injunction, the judge ruled Sun would probably win at trial - providing federal antitrust lawyers with another bit of evidence that Microsoft had abused its monopoly power.
But Microsoft caught a big break when Netscape Communications Corp., which the government had portrayed as perhaps Microsoft's biggest victim, agreed to be bought by America Online Inc. for $4 billion, with Sun Microsystems to adopt Netscape server software as part of the deal. Microsoft claimed the result would be a reshuffling of the computer market, demonstrating how little real power Microsoft had. By year's end, even Judge Jackson, who had seemed hostile to Microsoft, agreed the AOL-Netscape-Sun deal could undercut government arguments.
SUPERMARKET SWEEP
Consolidation in the Massachusetts supermarket industry continued apace in 1998, with J Sainsbury PLC, owner of Shaw's Supermarkets Inc., announcing plans to buy Star Market Cos. for $490 million.
At Shaw's headquarters in East Bridgewater, company officials suggested size is crucial for survival in an industry that is seeing smaller players get gobbled up. A few years ago, New England's biggest chain, Stop & Shop Cos., was bought by a Dutch company. In fact, with Star soon to be integrated into Shaw's, most of the big supermarket chains on the East Coast are now owned by Europeans.
Is there more consolidation ahead? Most likely. By making companies more efficient, consolidations are supposed to lead to lower prices for consumers; 1999 could test that theory.
BREAKING GROUND
Mayor Menino led the Millennium Place project groundbreaking ceremony
(Globe Staff File Photo)
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Commercial real estate development in downtown Boston broke a decade-long hiatus, with new names bringing new money to town.
Millennium Partners of New York began construction on a $400 million downtown hotel-cinema-condominium project, on the edge of Chinatown. Millennium also unveiled plans for a $300 million hotel-retail-residential complex, capped with a 50-story tower, straddling the Massachusetts Turnpike near Massachusetts Avenue in an area heretofore immune to big development.
The prospect of a $600 million convention center in South Boston and the completion of the Seaport Hotel across from the World Trade Center triggered renewed planning and debate over the future of what has been dubbed the Seaport District, which many expect will become a major extension of downtown.
Elsewhere, the $140-million office tower at 10 St. James Avenue in the Back Bay got under way as office vacancy rates reached their lowest levels since the 1980s. In the suburbs, speculative office buildings made a return. And all around the city, small and midsize hotels sprouted, attesting to pent-up demand for accommodations for a surge of business travelers.
Globe reporters Hiawatha Bray, Chris Reidy, and Ronald Rosenberg contributed to this story.
