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The Big Got Even Bigger

Free-flowing money made Garden State part of a record year for dealsBIZ SPOTLIGHT – Mergers & Acquisitions

Some venerable Garden State businesses changed hands last year through mergers and acquisitions. Dealmaking reshaped telecommunications, consumer products and pharmaceutical markets.

The largest deal in the state was Johnson & Johnson’s acquisition of Pfizer Consumer Healthcare for $16.6 billion. That purchase, the 10th-largest transaction in the country in 2006, according to Santa Monica, Calif.’s Factset Mergerstat, closed in late December and capped off a record year for M&A activity.

Meanwhile, according to a Factset Mergerstat U.S. report for 2006, there were 11,792 deals worth $1.48 billion last year nationwide. That is up from 11,013 deals worth $1.24 billion in 2005.

New Brunswick-based Johnson & Johnson scooped up a portfolio including the Listerine line of oral-care products and Sudafed cold and allergy products. These had formerly been part of the consumer health line of Morris Plains-based Warner-Lambert, itself purchased by New York City’s Pfizer for $90 billion in 2000.

These products will join Tylenol, Band-Aid bandages and Neutrogena skin care offerings in the Johnson & Johnson Consumer Group. “I think the deal made a ton of sense for Johnson & Johnson,” says Bill Martin, CEO of Indie Research, an investment-services firm in Princeton. “It’s their bread and butter. It’s what they do well, consumer marketing.”

Johnson & Johnson planned well for the acquisition, says Martin, improving its chances to see growth once the operations are fully integrated. “I’ve heard through the grapevine they have taken a lot of cost out of the business already,” says Martin. “They’ve worked very hard to rationalize it. They are bringing together two very similar businesses so there’s a lot of cost savings they can pull out of redundant marketing and sales. And Johnson & Johnson has a better marketing culture.”

Another deal that made observers put down their cell phones, if only temporarily, was the merger of French telecom giant Alcatel with beleaguered Lucent Technologies in Murray Hill. Paris-based Alcatel bought Lucent in a deal worth about $11 billion that also closed in December.

As Alcatel-Lucent, the merged communications-solutions provider is expected to generate more than $25 billion in combined revenue. About 8,800 employees were cut as a result of the combination. The deal sent former Lucent CEO Patricia Russo to Paris as the new company’s CEO. Bell Labs, Lucent’s historic research and development center, remains open in Murray Hill.

For Lucent, the merger may have seemed like a rescue mission, given its turbulent history since AT&T spun off the equipment maker in 1996. Then, Lucent’s opening share price was $7.56. Shares climbed into the $100 range in 1998 and 1999, only to be brought down to Earth by missed earnings estimates and questions about the company’s accounting practices. In October 2002, shares hit their low of $0.55. “Lucent’s been sucking wind since the bubble burst,” says Martin. “The merger is the end of the book on a pretty ugly couple of years.”

Lucent’s collapse took place amidst a wild reshuffling of telecom properties. Mergers among carriers had the effect of reducing the number of clients available to buy Lucent’s products so the firm tried reinventing itself through its own series of acquisitions and divestitures. The company acquired communications equipment maker Ascend Communications out of Alameda, Calif., for $24 billion in 1999, then spun off its Basking Ridge business-systems unit in 2000 as Avaya. Its microelectronics unit was spun off in 2002 as Agere Systems in Allentown, Pa.

Other major deals in the state last year included a $1.1 billion, or $13 per share, acquisition of biotech Sirna Therapeutics in San Francisco by pharmaceutical company Merck. The deal was announced last October and will give Whitehouse Station-based Merck control of a company developing medicine based on ribonucleic acid interference, a technique in which genetic material is harnessed to silence harmful genes. It is seen as particularly well suited in treating cancer.

Book publisher John Wiley & Sons, based in Hoboken, entered into a $1.08 billion agreement last November to acquire Britain’s Blackwell Publishing. Wiley produces technical and medical journals, encyclopedias and educational materials. Blackwell publishes academic and professional texts. The deal is expected to close early this year.

Blackwell generated about $380 million in revenue in 2005. The combined company will publish about 1,250 journals and books annually. The acquisition is expected to broaden Wiley’s international sales. “Approximately 40 percent of Wiley’s revenue is generated outside the states,” Will Pesce, president and CEO of Wiley said after the announcement. “About one-third of Wiley’s staff is located outside the states.” Blackwell’s CEO Rene Olivieri is expected to remain onboard to help lead the transition team.

Martin believes the flurry of activity in 2006 may continue into the new year because potential buyers with loads of cash remain open to making acquisitions. “There was a ton of activity in 2006,” Martin says. “There is so much money sloshing around, I think the key determinant is the credit markets. There are not a lot of worries or concerns about risk at this point in the market. As long as that continues, you’ll have guys looking to do deals.”

The wrench in the works could be what Martin calls credit shock and he sees signs of it in the mortgage lending market. “Even though interest rates haven’t increased, lenders are being much more selective,” he says. “But there’s going to be a lot of deal making for the foreseeable future.”

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