Consolidation Time

One of the things that usually happens as the economy recovers from a deep recession is that a wave of mergers and acquisitions begins as industries try to consolidate. Consolidation is now coming back full blast.

That happens for several reasons. There are plenty of sound companies that have been beaten down during the recession and are available for a good price. And the deals provide companies in similar opportunities a chance to cut their costs at a time when pricing power is very weak. There was news on Friday that consumer prices, excluding volatile food and energy costs, fell for the first time in years, even as producer prices are on the way up. If companies can't pass higher costs on to consumers, they need to slash expenses.

On Friday, word came that oil services company Schlumberger Ltd. is in advanced discussions to acquire Smith International, a provider of oil drill bits, according to the Wall Street Journal. The deal could be worth as much as $9 billion. While the oil services industry is in a slowdown, Schlumberger has a cash horde of nearly $5 billion with which to acquire rivals.

Earlier in the week, Walgreen Inc., the country's largest drugstore chain, announced a deal to buy Duane Reade Holdings Inc., a New York-based drug chain, for $1.1 billion. The deal will give Walgreen an additional 257 stores in New York.

“The drugstore industry has been consolidating for a few years as the large chains try to get purchasing scale,” says Adam Fein, president of Philadelphia-based Pembroke Consulting, who writes the drug industry blog drugchannels.net. He says that just six companies control 60 percent of the retail pharmacy industry.

Fein predicts a new wave of consolidation as a number of regional chains, with about 25 to 150 stores, are bought by the larger national chains. “The regional chains are kind of stuck in the middle,” Fein says. “They can't be as small and nimble as the independents, nor do they have the scale to negotiate with insurance companies that large national chains have.”

The mall business is consolidating too. On Tuesday, Simon Property, the nation's No. 1 mall operator, launched a $10 billion bid for General Growth, the bankrupt No. 2 ranked mall owner.

“Large portfolios of malls no longer come to market, they've already been gobbled up,” says Jim Sullivan, retail analyst at Green Street Advisers in Newport Beach, California. “What is so intriguing about General Growth is this is the rare situation where a gigantic, high-quality portfolio is effectively coming to market.”

Sullivan says the acquisition of the second-ranked mall operator by the nation's largest “will certainly push more negotiating strength to Simon when they deal with retailers” about such terms as rents. But he said that one fear of consolidation, that Simon would gouge tenants, probably would not come to pass because retailers have so many other options, online and off.

In a weak economy, buyers are calling the shots.