M&A Waves Flashcards
Term: M&A Waves: 1895-1904 (First Merger Movement)
Explanation: Period characterized by a surge in mergers and acquisitions activity.
Term: Macroeconomic Drivers of the first wave
Explanation:
Surge in the Economy and Stock Market: Favorable economic conditions and investor confidence.
Changes in Economic Infrastructure and Production Technologies: Development of transcontinental railroads and innovations like electricity.
Term: Key Motives of the first wave
Explanation:
Economies of Scale: Achieving cost savings and increased efficiency through combined operations and resources.
“Merging for Monopoly”: Pursuit of monopolistic control by eliminating competition and gaining dominance.
Term: (Organizational) Innovation (first wave)
Horizontal Trust: Formation of large, centralized organizations controlling multiple companies in the same industry.
Turning points of the first wave (1895-1904)
– In 1901, merger activity began downturn as some combinations failed to realize gains
– In 1903, economy went into recession
– In 1904, Supreme Court ruled against Northern Securities, establishing that mergers can be attacked by Section One of the Sherman Act
1922-1929: Second merger movement
Explanation: Mergers and acquisitions that occurred during the period of 1922-1929, characterized by increased activity.
what were the Macroeconomic drivers for the second Wave
– Surge in the economy and stock market
– Heightened regulation against horizontal combinations
– Critical innovations in
* Transportation: motor vehicles made both buyers and sellers more mobile
* Communications: national radio advertising allowed product differentiation
* Merchandising — mass distribution with low profit margins
what were the Key motives of the second wave
– Product-extension — IBM, General Foods, Allied Chemical
– Market-extension — food retailing, movie theaters, department stores
– Vertical mergers — metals, mining, oil
– Consolidation of fragmented industries — food processing, chemicals, mining
– “Merging for oligopoly”
what was the Turning point of the second wave
– Stock market crash of 1929
what is meant by “ Vertically Integrated Organization” in terms of the second Wave
Explanation: A business structure where a company controls multiple stages of the production or supply chain within a single entity.
Term: M&A Waves: 1960s (Conglomerate Mergers)
Explanation: Surge in mergers and acquisitions activity characterized by conglomerate mergers.
Conglomerate mergers involved the combination of companies operating in different industries or sectors.
Macroeconomic drivers of the conglomerate waves (1960)
– Surge in the economy and stock market
– Decline in relative importance of horizontal and vertical mergers.
At 1967-68 peak:
* Horizontal & vertical mergers declined to 17%
* Conglomerates increased steadily to about 23% of all mergers (or 35% in terms of assets)
what were the Key motives of the conglomerate waves
– Defensive diversification to avoid:
* Sales/Profit instability
* Poor growth prospects, industry uncertainty
* Adverse competitive shifts
* Technological obsolescence
what were some examples of Key motives of the conglomerate waves
Examples
* Aerospace industry – changing market demand, abrupt shifts in product mix, excess capacity, entry of firms from other industries
* Industrial machinery — sales instability
* Railway equipment, textiles, tobacco, movie distribution — low growth prospects
(Organisational) innovation
of the Conglomerate wave
– Conglomerate
Turning points of the conglomerate wave
– Antitrust laws
* Congress began to move against conglomerate firms in 1968
– Declining stock prices
Term: M&A Waves: 1981-1989 (The Deal Decade)
Explanation:
Surge in mergers and acquisitions activity during the 1980s.
came about due to Increased Deal Activity
Explanation: The 1980s saw a significant rise in the number and size of mergers and acquisitions.
Macroeconomic drivers of the deal decade wave
– Surge in the economy and stock market
– Growing capital market innovation and sophistication
– Impact of international competition on mature industries such as steel and auto
– New industries as a result of new technologies and managerial innovations
Key motives of the deal decade wave
– Unwinding diversified firms
Deal characteristics of the deal decade wave
– Mostly hostile
– Paid in cash
– Financed with debt
(Organisational) innovations of the deal decade wave
– High yield bonds
– Leveraged buyout
– Raiders
– Powerful takeover defenses e.g. poison pill
– Bustup acquisitions
* Buyers sought firms whose parts as separate entities were worth more than the whole
* After acquisitions, segments were divested
* Proceeds of sales were used to reduce the debt incurred to finance the transaction
what did the Decade of big deals (examples)
– Ten largest transactions
* Exceeded$6billioneach
* Summed to $126.1 billion
* Oil, drug, and tobacco companies
Turning points of the deal decade wave
– Government actions
* Passage of the Financial Institution Reform, Recovery, and Enforcement Act (FIRREA) in 1989
* Highly publicized insider trading cases
* Indictment of Michael Milken and bankruptcy of Dexel Burnham
– Successful implementation of takeover defenses
– Economic recession associated with Gulf War
Term: M&A Waves: 1992-2000 (Strategic Mergers)
Explanation:
Surge in mergers and acquisitions activity during the period, characterized by a focus on strategic objectives.
Term: Focus on Strategic Intent
Explanation: Strategic mergers aimed to achieve specific strategic objectives, such as market expansion or portfolio enhancement.
Macroeconomic drivers of the strategic mergers wave
– Surge in the economy and stock market
– Technological innovations, e.g. the internet, resulted in new industries and firms
– Globalisation; Europe moving towards one market
– Deregulation of numerous industries (telecom, energy, airlines,…)
Key motives of the strategic mergers wave
– Gain economies of scale and scope
– M&A as a result of shift in strategy due to industry shocks
Deal characteristics of the strategic mergers wave
– Mostly friendly
– Mostly paid with stock→permits long-term strategies to be executed
(Organisational) innovations of the strategic mergers wave
– Venture capitalist
– Stock options
– Massive use of share repurchases: used to signal future success
– Roll-up mergers
what were the Megamergers of the nineties (strategic wave)
– Top ten deals of the nineties totaled about $700 billion
– Size of M&As in relation to level of economic activity
* In the eighties, M&As represented less than 4% of GDP
* For period 1993-2000, M&As represented about 9% of GDP
* By 1999, M&As represented 15% of GDP
what was the Turning point of the strategic mergers wave
– Burst of the dotcom bubble in 2000
Term: M&A in the 21st Century: “The Permacrisis”
Explanation: The state of perpetual crisis and uncertainty influencing M&A activity in the 21st century.
Term: Economic Instability
Explanation: Significant economic volatility, financial crises, and global uncertainties impacting M&A decision-making.
what are the Common key drivers of major merger movements
– Government (de)regulations
– Technical and/or financial innovations
– Rising stock prices
– Favorable economic setting with
> Low interest rates
> Favorable term structures of interest rates
> Narrow risk premia
Mergers have been found to cluster in time and industries, for example:
1920s:
– 5 of 25 industries represented over two-thirds of merger activity
- 1980s (Mitchell and Mulherin, 1996):
– Over 2/3 of firms in broadcasting, petroleum producing, and air transport were
acquired
– 50% of mergers in given industry occurred within 2 year period – Reasons: - Economic shocks (deregulation, oil prices)
- Financial factors (availability of debt financing)
- M&A activity in other developed countries of the world has usually paralleled the U.S.
give some underlying factors
– Similar levels of merger activity
– Similar industry clustering
Underlying factors:
– Internationalization of markets
– Globalization of competition
– Privatization achieves similar results to deregulation
– Anti-merger laws and regulations are generally loosening internationally
