M&A Waves

Question 1

Term: M&A Waves: 1895-1904 (First Merger Movement)

Answer 1

Explanation: Period characterized by a surge in mergers and acquisitions activity.

Question 2

Term: Macroeconomic Drivers of the first wave

Answer 2

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.

Question 3

Term: Key Motives of the first wave

Answer 3

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.

Question 4

Term: (Organizational) Innovation (first wave)

Answer 4

Horizontal Trust: Formation of large, centralized organizations controlling multiple companies in the same industry.

Question 5

Turning points of the first wave (1895-1904)

Answer 5

– 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

Question 6

1922-1929: Second merger movement

Answer 6

Explanation: Mergers and acquisitions that occurred during the period of 1922-1929, characterized by increased activity.

Question 7

what were the Macroeconomic drivers for the second Wave

Answer 7

– 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

Question 8

what were the Key motives of the second wave

Answer 8

– 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”

Question 9

what was the Turning point of the second wave

Answer 9

– Stock market crash of 1929

Question 10

what is meant by “ Vertically Integrated Organization” in terms of the second Wave

Answer 10

Explanation: A business structure where a company controls multiple stages of the production or supply chain within a single entity.

Question 11

Term: M&A Waves: 1960s (Conglomerate Mergers)

Answer 11

Explanation: Surge in mergers and acquisitions activity characterized by conglomerate mergers.

Conglomerate mergers involved the combination of companies operating in different industries or sectors.

Question 12

Macroeconomic drivers of the conglomerate waves (1960)

Answer 12

– 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)

Question 13

what were the Key motives of the conglomerate waves

Answer 13

– Defensive diversification to avoid:
* Sales/Profit instability
* Poor growth prospects, industry uncertainty
* Adverse competitive shifts
* Technological obsolescence

Question 14

what were some examples of Key motives of the conglomerate waves

Answer 14

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

Question 15

(Organisational) innovation
of the Conglomerate wave

Answer 15

– Conglomerate

Question 16

Turning points of the conglomerate wave

Answer 16

– Antitrust laws
* Congress began to move against conglomerate firms in 1968
– Declining stock prices

Question 17

Term: M&A Waves: 1981-1989 (The Deal Decade)

Answer 17

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.

Question 18

Macroeconomic drivers of the deal decade wave

Answer 18

– 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

Question 19

Key motives of the deal decade wave

Answer 19

– Unwinding diversified firms

Question 20

Deal characteristics of the deal decade wave

Answer 20

– Mostly hostile
– Paid in cash
– Financed with debt

Question 21

(Organisational) innovations of the deal decade wave

Answer 21

– 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

Question 22

what did the Decade of big deals (examples)

Answer 22

– Ten largest transactions
* Exceeded$6billioneach
* Summed to $126.1 billion
* Oil, drug, and tobacco companies

Question 23

Turning points of the deal decade wave

Answer 23

– 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

Question 24

Term: M&A Waves: 1992-2000 (Strategic Mergers)

Answer 24

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.

Question 25

Macroeconomic drivers of the strategic mergers wave

Answer 25

– 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,…)

Question 26

Key motives of the strategic mergers wave

Answer 26

– Gain economies of scale and scope
– M&A as a result of shift in strategy due to industry shocks

Question 27

Deal characteristics of the strategic mergers wave

Answer 27

– Mostly friendly
– Mostly paid with stock→permits long-term strategies to be executed

Question 28

(Organisational) innovations of the strategic mergers wave

Answer 28

– Venture capitalist
– Stock options
– Massive use of share repurchases: used to signal future success
– Roll-up mergers

Question 29

what were the Megamergers of the nineties (strategic wave)

Answer 29

– 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

Question 30

what was the Turning point of the strategic mergers wave

Answer 30

– Burst of the dotcom bubble in 2000

Question 31

Term: M&A in the 21st Century: “The Permacrisis”

Answer 31

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.

Question 32

what are the Common key drivers of major merger movements

Answer 32

– 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

Question 33

Mergers have been found to cluster in time and industries, for example:

Answer 33

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)

Question 34

• M&A activity in other developed countries of the world has usually paralleled the U.S.
  give some underlying factors

Answer 34

– 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