Merger Waves

5 Key excerpts on "Merger Waves"

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  eBook - ePub

  Mergers & Acquisitions

  Theory, Strategy, Finance

  • Mohammed Ibrahimi(Author)
  • 2018(Publication Date)
  • Wiley-ISTE

    (Publisher)

  3.1. Merger/acquisition waves

  The wave phenomenon in mergers and acquisitions is one of the fundamental issues in corporate finance. A wave consists of a sudden and massive upsurge in the number of operations, concentrated within a specific period. Economic history is marked by global macro-waves of acquisitions. These waves have contributed significantly to the evolution of managerial thought in reaction to the phenomenon, particularly in the US; in France, research in this area developed much later, concentrated in the last few decades.

  3.1.1. Global market and merger/acquisition waves

  3.1.1.1. Merger/acquisition waves from 1990–2016

  Finkelstein and Cooper [FIN 09] note that international literature on mergers and acquisitions is, to a certain degree, fragmented. The sums involved, however, have reached phenomenal heights. In 2016, for example, 47,000 operations took place, with a total value in excess of 3,100 billion euros. The evolution of the phenomenon from 1990 to 2016 is shown below.

  Figure 3.1.

  Number and value of mergers/acquisitions worldwide

  (Source: Thomson One Banker)

  Figure 3.1 . shows three waves of international mergers and acquisitions:

  • – 1999–2000: record years in terms of the sums involved. The total for these operations increased by 53% between 1998 and 1999 to over 3,900 billion euros, a sum which had never been attained in previous years, and which was not seen again until 2015. This development was supported by the dot-com bubble and the emergence of new technologies.
  • – 2006–2007: the end of the period preceding the financial crisis which began in late 2007. At this point, the sum of worldwide mergers and acquisitions reached 3,600 billion euros and in excess of 47,000 operations. This wave affected all sectors: primary, secondary and tertiary. However, it was most significant in the areas of finance and real estate.
  • – 2014–2015: figures for 2015 showed a 42% increase on the previous year. The value of merger and acquisition operations reached an unprecedented 4,271 billion euros. This development was supported by the Asian markets, consolidating the 2014 increase, following the drop-off after the 2008 financial crisis.

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  International Mergers and Acquisitions Activity Since 1990

  Recent Research and Quantitative Analysis

  • Greg N. Gregoriou, Luc Renneboog(Authors)
  • 2007(Publication Date)
  • Academic Press

    (Publisher)

  1 Understanding mergers and acquisitions: activity since 1990 Greg N. Gregoriou and Luc Renneboog Abstract This chapter discusses the trends in international market for corporate control. Each mergers and acquisitions (M&A) wave has been characterized by a different set of underlying triggers. However, we consistently find that takeovers early in the wave are triggered by industry shocks. Takeovers are more likely to occur during periods of economic recovery, and the takeover market may be driven by regula-tory changes as well as by industrial and technological shocks. Managers’ personal goals may have further impact on takeover activity: We find that managerial hubris and herding behavior tend to increase during takeover waves, often leading to inef-ficient acquisitions. Finally, takeover activity usually collapses alongside a market decline and an economic recession. The chapter also positions the papers of this book in the international literature. 1.1 Introduction Understanding the drivers of mergers and acquisitions means understanding their cyclical nature (see Golbe and White, 1993, for one of the earliest docu-mentations of this phenomenon). It is commonly accepted that there have been five waves of major merger activity: the 1890s, the 1920s, the 1960s, the 1980s, and the 1990s. The scale of the final wave is remarkable for its breadth and geographic distribution. This wave saw tremendous U.S. M&A growth, but it was also witness to soaring levels of European M&A activity, as firms started to partner actively with U.S. and U.K. firms. M&A activity has been on the rise again since June 2003, perhaps suggesting a new wave. This recent increase in takeover activity could have wide-ranging rami-fications and raises many interesting questions. We briefly review the historical and recent literature on M&A activity by wave for the U.S., U.K.

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  Mergers

  What Can Go Wrong and How to Prevent It

  • Patrick A. Gaughan(Author)
  • 2005(Publication Date)
  • Wiley

    (Publisher)

  This gave rise to the name of this period — the Conglomerate Era. Once the enforcement stance changed, companies began to pursue more deals within their own industry and fewer outside of their industry boundaries. The phenomena of industry clustering has been documented by several researchers. Mitchell and Mulherin showed this phenomena applied to the fourth merger wave. 9 Andrade and Stafford showed it over a longer period: 1970 –1994. 10 Industry clustering contrasts with diversification, which is a strategy companies pursue far less fre- quently than deals within companies’ own industries. When M&A patterns that have occurred in the United States are reviewed, we notice that the number of deals do not continue smoothly but tend to be concentrated in clusters and exhibit wavelike patterns. Industry Clustering 69 In Chapter 1, we noted certain patterns in these clusters or waves. For example, the first wave of the late 1800s was noted for the for- mation of monopolies, the wave of the 1920s oligopolies, the late 1960s conglomerates, and the fourth wave of the 1980s was noted for its hostile takeovers as well as other characteristics. The fifth wave seems to show more strategic deals and fewer short-term purely financial plays. Looking back on the fifth wave and comparing it with the fourth wave, we can note some common features in these two periods that initially seemed to be more different than similar. One common feature of these two waves is that many of the deals tended to be concentrated or clustered in specific industries. These industries, in turn, often were those that underwent significant dereg- ulation — what some researchers have referred to as shocks —a term more often utilized in macroeconomic theory to refer to systemic changes that affect the overall level of economic activity. In the context of M&A research, industry shocks are defined as any factor that changes the industry structure.

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  Mergers, Acquisitions, and Corporate Restructurings

  • Patrick A. Gaughan(Author)
  • 2002(Publication Date)
  • Wiley

    (Publisher)

  the financing for many of the LBOs of the period. These events are discussed in detail in Chapters 7 and 8. THE FIFTH WAVE Starting in 1992 the number of mergers and acquisitions once again began to increase. Large deals, some similar in size to those that occurred in the fourth merger wave, began to occur once again. Although the fifth merger wave featured many large megamergers, there were fewer hostile deals and more strategic mergers occurred. As the economy recovered from the 1990–91 recession, companies began to seek to expand and mergers once again were seen as a quick and efficient manner in which to do that. Unlike the deals of the 1980s, however, the transactions of the 1990s emphasized strategy more than quick finan- cial gains. These deals were not the debt-financed bustup transactions of the fourth merger wave. Rather, they were financed through the increased use of equity, which resulted in less heavily leveraged combinations. Because the deals of the early 1990s did not rely on as much debt, there was not as much pressure to quickly sell off assets to pay down the debt and reduce the pressure of debt ser- vice. The deals that occurred were motivated by a specific strategy of the acquirer that could more readily be achieved by acquisitions and mergers than through internal expansion. THE FIFTH WAVE 51 CASE STUDY: LING-TEMCO-VOUGHT— THE GROWTH OF A CONGLOMERATE The growth of the Ling-Temco-Vought (LTV) Corporation is one of the classic sto- ries of the growth of conglomerates during the third merger wave. The company was led by James Joseph Ling—the Ling of Ling-Temco-Vought. The story of how he parlayed a $2,000 investment and a small electronics business into the fourteenth largest industrial company in the United States is a fascinating one.

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  The Art of Capital Restructuring

  Creating Shareholder Value through Mergers and Acquisitions

  • H. Kent Baker, Halil Kiymaz, H. Kent Baker, Halil Kiymaz(Authors)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  Answers to End-of-Chapter Discussion Questions CHAPTER 2 Merger Waves 1. Motives for individual mergers include agency-related and hubris-driven motives as well as efficiency and market power/collusion–based motives. Agency and hubris–driven mergers should result in wealth losses for bidding shareholders and, due to the lack of synergies, would not create value overall. If the wealth loss from bidder shareholders is purely transferred to target shareholders, the combined net value creation would be zero. If the merger involves additional costs, the net value creation could be negative. More efficiency-based reasons include economies of scale and/or scope and the possibility of creating market (pricing) power through horizontal merger in a concentrated industry. In these cases, the combined net value creation is positive, but the premium paid determines how much of it bidder shareholders capture (resulting in positive bidder announcement return). 2. Some behavioral hypotheses are market driven, such as Shleifer and Vishny (2003), where overvalued equity directly leads managers to use equity as currency to acquire the real assets of targets. In others, the high valuation creates uncertainty for target managers as to whether the premium represents true synergies or misvaluation. In the neoclassical view, the rising stock market reflects aggregate economic activity as well as capital liquidity, both of which contribute to increasing merger activity. Thus, rising stock prices do not cause the merger activity but reflect the same underlying forces that cause the activity. 3. There are many ways to use international data to examine the causes of Merger Waves. First, using international data would potentially be a good test of the behavioral hypotheses in the following way

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