New Mega-Merger a Three Bagger

In mergers, two's a deal. But lately, three's been the number of choice.

Amid a flurry of recent merger activity, two commodities firms outdid themselves. Anadarko ( APC), a petroleum firm, and Phelps Dodge ( PD), the world's largest copper miner, both announced 11-figure transactions over the last five days to acquire not one, but two rivals.

The two-at-a-time asset grabs show how antsy companies are in the metals and energy sectors to nail down partners using stock that often has run up with the underlying commodity. Some specialists, meanwhile, wonder if their ambitious acquisitions might be prove too challenging.

"It is unusual to see a company announce two deals" at one time, said Octavio Marenzi, CEO of the consulting firm Celent. Aligning three companies is certainly more distracting than two, and synergies can be difficult to obtain, Marenzi says. Still, although these large transactions can be risky, "people are rushed to close a deal."

On Friday, Anadarko said that it would acquire Kerr-McGee ( KMG) and Western Gas Resources ( WGR) in two separate transactions that total $23.3 billion. On Monday, Phelps Dodge said that it would merge with Inco ( N) and Falconbridge ( NYSE), two Toronto-based nickel-mining firms, in a combined transaction valued at about $40 billion.

Market conditions have created a sense of urgency for acquisitions in the commodities sector. As commodities prices surged over the past year, so did the stock market value of commodity businesses. Shares in Phelps Dodge, for example, have almost doubled in the past year.

"The deals are heavily driven by fundamental turbulence in natural resources," says Robert Bruner, dean of the University of Virginia's Darden School of Business. "There has been a sharp increase in demand ... for raw and refined metal products," pushing up commodities prices and, in turn, the companies' shares.

Add to that a dose of corporate peer pressure, and the urge to merge becomes overwhelming.

"There is a herd mentality in the market. They are seeing other people doing deals, so it pushes people into thinking that they have to do deals at the same time," Marenzi says. "Certainly, some people say that they have a rich currency, so they want to take advantage while they still can."

Other factors stir the pot. Interest rates are relatively low, enabling companies to more easily finance an acquisition -- or two.

"We know the Federal Reserve may feel some pressure to raise interest rates to suppress inflation," Bruner says, "There is no doubt that the companies felt that waiting would produce a more expensive deal."

Phelps Dodge had another reason to hurry: blocking rival suitors from picking off its targets first. For nine months before Phelps Dodge surfaced, Inco and Falconbridge had been involved in a merger waltz with each other and had attracted the attention of at least two outside suitors. Instead of waiting for those deals to be consummated, Phelps Dodge launched its surprise attack.

"There was another strategic buyer stalking these companies, and we can guess that Phelps felt the need to pre-empt its competitors from falling in the hands of the other firms," Bruner says.

Ultimately, executives at Phelps and Anadarko may have created more problems than they solved. For example, driving Phelps' $40 billion offer was $900 million in anticipated annual synergies with Inco and Falconbridge, which the company promised over the next two years. Some experts are concerned the company will have trouble delivering such lofty goals.

"Integration is a phenomenally complicated challenge," says Bruner. "Acquiring two firms simultaneously exponentially increases the complexity."

There are massive "logistical issues," Bruner notes, and at each step of the integration process, the companies have multiple chances of stumbling. "You need to coordinate purchasing, production, distribution channels, and align sales forces. Embedded in each one of these are numerous opportunities for screwing up," he says.

Meanwhile, the management is twice as preoccupied, Marenzi says. "It takes management's attention away quite effectively."

Of course, the potential for reward is obviously huge if integration is successful. As the largest nickel and copper miner in the world, Phelps Dodge Inco will certainly have size working in its favor. But there may be other issues as well, and the company will certainly have to hit the ground running.

"In order to achieve forecasted synergies, the integration needs to go smoothly and fairly rapidly," Bruner said.

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