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Driven by a spate of dealmaking in the pharmaceutical sector, New Jersey mergers and acquisitions bounced back in 2002 after a brief but dramatic decline. Activity in 2002 was well ahead of the 2001 volume but not up to the feverish level of 2000. The total value of the 30 biggest transactions touching New Jersey companies in 2002 was $76 billion. That’s up from the 2001 total of $32 billion but less than the $155 billion logged in 2000. (See Largest N.J. M&A, 2002) The drug industry accounted for seven of the top 30 deals last year, the greatest plurality. Among them was the chart-topper: Pfizer Inc.’s announced $61 billion takeover of Pharmacia Corp. Real estate was the second most active sector, with five mergers in the top 30, while four deals involved companies that provide healthcare-related services, like lab testing and employee training. Sadly for New Jersey firms, the top 30 mergers were forged in out-of-state shops. Of the 35 participating firms, 21 were from New York, two from Los Angeles, two from London and the rest from scattered reaches of the globe. Dewey Ballantine of New York was the leader, with seven, followed by Skadden, Arps, Slate, Meagher & Flom of New York, with six. The continued slump in the stock market has put a damper on mega-mergers — those valued at $10 billion or more — because deflated stock prices make it harder to fund acquisitions. While other sectors take the sidelines, however, drug companies, driven by a perpetual need for new products and innovations, have remained in the market for startup companies, says Steven Cohen, a partner in the Princeton, N.J., office of Morgan Lewis & Bockius. And PricewaterhouseCoopers pharmaceutical analyst Neal Ransome sees the purchase of Pharmacia by larger rival Pfizer as “the return of the mega-deal” to the drug sector. The Pfizer-Pharmacia deal breaks a two-year slump in large pharmaceutical acquisitions, says Ransome, adding there’s room for further consolidation. “The sector remains fragmented relative to many other sectors, and previous mega-mergers have demonstrated that companies can significantly enhance profits by taking cost out of the combined businesses,” he says. A ‘RISK-AVERSE’ TIME Despite the resurgence in merger activity in 2002, the outlook for deal making remains unsure, says James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. Hughes sees “gridlock” afflicting decision-making in corporate America, due in part to the aftereffects of past expansions. The prospects of war with Iraq or North Korea make CEOs more reluctant to launch acquisitions, he says. “They made bad decisions in the late ’90s with regards to expansion and now they’re afraid to make commitments,” says Hughes. “In order to move forward, we need people willing to take risks again, and this is a risk-averse time.” New Jersey law firms active in mergers and acquisitions say that 2002 was better than 2001, and that the worst effects of the downturn were not felt in the state. At Newark’s Sills, Cummis, Radin, Tischman, Epstein & Gross, where pharmaceutical companies make up a large part of the corporate department’s client base, stock-based mergers and acquisitions have been largely replaced by cash transactions, according to firm co-chairman Steven Gross. While the merger and acquisition business has remained steady, clients’ outlook has changed dramatically in recent years, Gross says. “The deal participants are exercising much more caution and due diligence in examining the transaction they are doing,” Gross says. “What’s also happening is business executives are being much more cautious by virtue of Sarbanes-Oxley. That happens to be pretty good for lawyers because it requires everybody to be more cautious.” At the same time, low borrowing rates led to mergers involving undercapitalized startups or companies that are in distress or burdened with debt, says W. Raymond Felton III, a partner at Greenbaum, Rowe, Smith, Ravin, Davis & Himmel in Woodbridge, N.J., and chairman of the Corporate and Business Law Section of the New Jersey State Bar Association. Changing economic conditions are altering the deal-making landscape as well. In rosier times, drug companies made purchases to access technology under development, but now they want to fill gaps in their product line, says Ransome of PricewaterhouseCoopers. One example is the $360 million purchase by Bridgewater, N.J.-based Enzon Inc. of Irish drugmaker Elan Corp. and its Indianapolis manufacturing plant. Elan produces the drug Abelcet, which treats fungal infections related to cancer and organ transplantation. The acquisition was the 13th-largest in the state last year. That same product-based acquisition model is spilling over to the state’s software and high-tech industries, says Cohen of Morgan Lewis. Cohen, who worked on the Enzon deals, calls the trend a good thing for the state’s deal-making climate. “I do think we’ll go back to the same level of activity, because there’s so much excellent technology and science being developed, and it makes so much more sense to combine it with sales forces that already exist than creating your own sales force,” Cohen says. With layoffs at Lucent and AT&T and other places, “a lot of brainpower is available,” he says. “That creates a good environment for emerging companies.” NO JERSEY BOUNCE While conditions improved in the merger and acquisition market, New Jersey law firms continued to be excluded from the big game, largely because they lack the resources for transactions involving international holdings. Morgan Lewis’ Cohen says New Jersey firms lack the expertise their New York rivals offer merger clients. He recalls encountering an intricate accounting issue in a recent transaction involving a public company and calling in a fellow partner from his firm’s Washington office, Linda Griggs, a former counsel to the accounting division head of the Securities and Exchange Commission. “You have a lot of that in New York. You don’t have that in the indigenous New Jersey law firms,” Cohen says. But Greenbaum Rowe’s Felton says New Jersey firms may have an edge in smaller deals, because while New York firms can offer specialized talent, they also rack up more billable hours.

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