PhillyDeals: Corporate mergers kill jobs - sometimes

The big drug-company mergers - Pfizer-Wyeth, Merck-Schering Plough, and yesterday's GlaxoSmithKline-Stiefel Laboratories, among others - will end thousands more jobs in a tough hiring market, says John A. Challenger, chief executive of job-search firm Challenger, Gray & Christmas Inc.

Big tech deals like yesterday's Oracle-Sun Microsystems will cost thousands more. Challenger counts more than 44,000 jobs lost to mergers and acquisitions so far this year, up from 8,000 last year.

"The reality is, when there's a merger and an acquisition, they don't need two headquarters; that's the first place to go," he told me. "They don't need two sales forces. They don't need two warehouses in one city."

But not all mergers cut jobs. Big companies buy small ones to find "new sources of revenue. The lab, the research-and- development, the next big thing."

For example, there's EMS Formation, the Moorestown-based company that makes ToughDisk systems to run in-flight movies and Internet connections, among other products.

The former Formation Inc. was acquired in January by EMS Technologies Inc., Atlanta, for $40 million (plus up to $15 million if it keeps meeting two-year sales targets). Head count has grown to 115, from 68 last year, says general manager R. Nim Evatt.

Formation said yesterday that it had been hired by Florida-based LiveTV L.L.C., which provides in-flight video and Internet for Continental, JetBlue, Frontier and other airlines.

The LiveTV deal strengthens Formation's market share in "aero connectivity," Evatt told me. "Aircell [based near Chicago] is putting equipment on American, Delta, and Virgin. They've announced United and Northwest. Row 44 [based in California] is doing testing on Southwest and Alaska Airlines." Both are already Formation customers. "We also have Airbus, as a manufacturer." And Formation builds communications systems for New York City subways.

Formation has recovered ground it lost earlier this decade, Evatt says. "After 9/11 we had a very close call. We went from 120 people to 50 and just barely survived." The company saw no choice but to keep rolling out new products - which won sales from increasingly tech-dependent travelers, attracting EMS as a buyer and backer.

So mergers don't always kill jobs. Tech and "health care is where this economy will be centered in the next era," says Challenger. But meanwhile, "changes in the industries' structure are going to hurt, a lot."

What's a shopping mall worth anymore?

Jonathan D. Miniman, senior analyst at ING Clarion Real Estate Securities, says it's gotten tough to tell.

He notes that Lend Lease Corp. Ltd. took its half of the blue-chip King of Prussia mega-mall complex off the market last fall after disappointing bids. "They could afford" to wait for markets to improve, he added.

Last week's Chapter 11 bankruptcy filing by General Growth Properties, the No. 2 U.S. mall chain, has more to do with its own "extremely aggressive" borrowing and tough credit markets, than the shoppers' slowdown, he argues.

"The bears want to believe that the mall is dead, and everyone will follow down the path of General Growth. That just isn't true . . . This is a capital-markets issue, not a cash-flow issue."

What's that mean for Pennsylvania Real Estate Investment Trust, the Philadelphia area's biggest mall operator? "They are similar in that [PREIT] has spent a ton of money renovating several assets and bringing them on line in the worst consumer spending period in years . . . The issue, again, is the balance sheet," not long-term mall values, says Miniman.

"They have a large unsecured credit facility due in early 2010, and a smaller unsecured term loan due in March 2010 with a one-year extension option . . . They don't have a lot of breathing room" with their bank covenants.

Lenders don't want to own malls; he says he expects they'll settle for higher interest rates, noting recent deals by other operators in the 7- to 8.5-percent interest range. "It's expensive" by mid-2000 standards, Miniman added. "But it's not the end of the world."