By the looks of it, Chicago would seem to be losing out: Houston-based USA Waste Services Inc.’s takeover of Waste Management Inc. of Oak Brook would add a name to the list of companies moving out, or moving their headquarters out.
Illinois Central Corp., U.S. Robotics Corp. and Culligan Water Technologies Inc. are among the former–or soon-to-be-former–companies caught in the frenzy of merger and acquisition activity over the past two years.
Looking at the list of the dearly departed, one might become concerned that Chicago is fading quickly as a headquarters kind of town.
The reality, however, is that overall in the last two years, more local firms have acquired outside firms than the other way around, according to George A. Parry & Associates, which tracks merger and acquisition activity in Chicago.
Of the 446 mergers and acquisitions in Chicago last year, 300 were acquisitions of companies by Chicago companies. Another 104 acquisitions were of Chicago firms by outside firms. Another 42 were Chicago firms acquiring other Chicago firms.
Deerfield-based Baxter International Inc. has been buying smaller firms, including Boulder, Colo.-based Somatogen for $198 million last month. And two companies controlled by Sam Zell, Equity Residential Properties Trust and Equity Office Properties Trust, are now among Chicago’s 50 biggest companies, measured by market capitalization, thanks to a spate of acqusitions.
And that’s good news for a city that relies on a strong base of headquarters for everything from corporate philanthropy to attracting a more professional labor pool.
But what has caught the attention of some economists and consultants is the size and scope of some of the largest firms that have been acquired by outsiders.
The top 10 deals in 1997 in the Chicago area totaled $21 billion, compared with $12 billion for the top 10 deals in 1996, according to Parry. That included the high-profile buyout of Skokie-based U.S. Robotics by 3Com Crop. of Santa Clara, Calif., last year.
“Most of the multibillion-dollar deals have been by outsiders,” Parry said. “It’s of some concern. Headquarters represent jobs that usually leave the community. That’s true of any major acquisition.”
But what effect the loss of all these headquarters has on a metropolitan area as big as Chicago is a matter of debate among business leaders and academics alike.
While the departure of a headquarters like Eastman Kodak Co. would likely hurt its home city of Rochester, N.Y., a major headquarters loss may not have nearly the same impact on Chicago.
“I don’t think it should be a `sky is falling’ type of thing,” said Douglas Whitley, president of Ameritech Illinois. “In the business world, you will always see management changes. Chicago’s economy is very strong. I don’t see a handful of Chicago companies being acquired from companies outside of Chicago as a major worry.
“Clearly the ownership of the railroads has moved out of the city, but as far as the volume of shipping going on, I’d have to say it’s probably as high as ever,” he added.
More difficult to gauge, however, is the effect loss of senior personnel will have on the city when it comes to philanthropy and attracting top senior executives, as well as what it means to the city’s top business education institutions.
A number of Chicago non-profit institutions ranging from the Lyric Opera to the Lincoln Park Zoo have benefited from active corporate philanthropy programs by some of Chicago’s biggest businesses, including Ameritech Corp., Philip Morris Cos. (which owns Northfield-based Kraft Foods) and Sara Lee Corp.
According to analysts, the rule of thumb when a corporate headquarters leaves town is that two-thirds of the top management is gone within two years.
But that’s not to say that there aren’t benefits to the acquisition. While local officials were anxious when U.S. Robotics was sold to 3Com, the company said that it would build its regional headquarters in Rolling Meadows.
“In that case, the merger is really for growth,” said Steven Kaplan, professor of finance at the University of Chicago.
“The other thing it does is put a lot of money in the hands of people selling,” he added. “They may eventually fund new businesses, which is a positive for the area.”
If anything, analysts say, the movement may put some pressure on communities to keep things attractive locally for businesses.
