The Year Of The Mega Merger To understand what's driving the urge to merge, just follow the money.
By Geoffrey Colvin Data Compiled By Ann Harrington And Mary Danehy

(FORTUNE Magazine) – Have you been receiving these checks in the mail? Not ones made out to you; ones you write. They've got your name and address printed in the corner, just like your regular bank checks--except you didn't ask for these, and you don't have any money on account with the institution that sent them. These checks come from credit card companies, you quickly realize, and writing one constitutes a loan. America's card issuers are desperate for you to spend their money; what they'd really like is to come around and place currency in your hands, but this is the closest they can get. Their simple plea: Take some money--please!

Those checks you didn't ask for are a small sign of something historic. Look around. In Silicon Valley, venture capitalists with billions burning holes in their pockets are courting geeks with ideas instead of vice versa. Over at the Securities Data research firm, the meter tracking investment-grade debt bought this year just clicked past a nice round trillion dollars, up 44% over this time last year, which had been the biggest year ever. Europeans recently discovered junk bonds and are devouring them like Muscovites going after half-price Big Macs. Most of Europe's central banks are lending to commercial banks at 3%, which means the real rate is minuscule. In Japan, of course, money is pretty much free.

Entire continents are hearing the same entreaty that you are: Take some money--please!

If you're wondering why 1998 was the biggest year ever for takeovers--biggest by a mile, according to any dollar-volume measure, against any other year, adjusted for anything, as a percentage of whatever you want--this is the short answer: The world has more financial capital than it knows what to do with. This extraordinary abundance of money available for investment has fueled this greatest-ever merger wave in two big ways.

One, it has financed the building of overcapacity in almost every industry that still uses bricks and mortar, plus several that don't. The world can crank out way more steel, paper, chemicals, and cloth than the world wants at anything like current prices. There are too many airline seats in the air and too many cars, car dealers, and gas stations on the ground. There's too much gold, silver, aluminum, and copper, and too many ships hauling it all around. There are too many hogs. Too many companies sell financial services, telecommunications services, and most things that get retailed. There are still too many banks. Overcapacity leads to brutal price competition, which leads to consolidation.

Two, much of that abundant capital has gone into stocks, pushing their values to levels few dared to imagine and creating the currency with which these deals get done. One of the many ways this merger boom is different from others is that it has been stock-driven. Near the peak of the last merger wave, in 1988, stock accounted for 7% of the value of deals. This year it was 67%, by far the highest level in the past decade, according to J.P. Morgan.

Combine an urgent need to consolidate with a never-before-seen opportunity to buy other companies on favorable terms, and 1998 is what you get. Not only was total deal volume the greatest ever, but individual deals were historically mammoth. We think of Exxon-Mobil, the biggest ever, or Travelers-Citicorp, the record holder for all of eight months, but we forget others that would have seemed staggering a year ago. Talk about the year of the megamerger: Eight of the ten biggest deals of all time--and all of the seven biggest--happened in 1998.

If abundant capital is realigning whole industries and even economies, you have to ask how it got so abundant. The short answer is the worldwide economic revolution--the combination of infotech, deregulation, privatization, lowered trade barriers, and resulting globalization that is defining our era. When money is just electrons that can whip around the world at least four times in a second, monetary expansion can happen in all sorts of weird ways.

Look how these trends reinforce each other: Globalized markets mean capital flies from high supply to high demand as never before. As economists Barry Eichengreen and Michael Bordo have pointed out, investors placing money abroad used to favor companies with loads of physical assets; if you couldn't get all the information you wanted, at least you had the comfort of owning locomotives or factories. Now technology that gives investors tons of real-time information enables them to invest in a far wider range of ventures around the world. Two of the largest policy trends of the past decade, deregulation and privatization, free up capital as the affected companies are forced to operate more efficiently. Lowered trade barriers--another giant trend--liberate more capital by exposing overcapacity that used to be protected; do Italy and Sweden really need their own auto industries today? And as Alan Greenspan has pointed out, technology makes capital more flexible: Dell builds every computer to spec, recasting its product line daily at the market's whim, and has created far more wealth using about a half-billion dollars of capital than, say, Union Pacific has created with $29 billion.

Money roaring around the globe, no deal too big, companies coupling with desperate abandon--more than 200 mergers a week: Capitalism has never seen the likes of this before. And yet our situation looks soberingly familiar through at least one lens. The great economic historian Charles P. Kindleberger was an authority on manias, panics, and crashes, and seeing his model of a typical crisis in today's news is disturbingly easy. It begins, he says, with a mania; history "is replete with canal manias, railroad manias, joint stock company manias, land manias, and a host of others." Now, let's see...does Exxon's buying Mobil at a 34% premium to a near-record market price suggest a current analogue? Next comes monetary expansion, which happens to be one of the preeminent economic features of the past few years. The model then calls for swindles to emerge; SEC INCREASES ACCOUNTING-FRAUD PROBES was a recent Wall Street Journal headline. After that comes "international propagation," which of course happens continually today. Then comes the crash.

Of course, those who expect a crash have been expecting it for ages, and it keeps not happening. Things are different this time, says the opposing school, and certain things are different. Dozens of industries still carry heavy overcapacity; stocks are still strong; capital is still abundant and cheap. So don't think we're through the great merger wave. Maybe we haven't seen the half of it. The mind reels, but that's something we're getting used to.