Mergers, Acquisitions, and Corporate Restructurings. Gaughan Patrick А.
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This seems to be particularly the case in the United States, where there is less respect for that which is not new. It is not surprising, then, when we see that many of the mistakes and types of failed deals that occurred in earlier years tend to be repeated. The market seems to have a short memory, and we see that a pattern of flawed mergers and acquisitions (M&As) tends to reoccur. It is for this reason that we need to be aware of the history of the field. Such an awareness will help us identify the types of deals that have been problematic in the past.
There have been many interesting trends in recent M&A history. These include the fact that M&A has become a worldwide phenomenon as opposed to being mainly centered in the United States. Other trends include the rise of the emerging market acquirer, which has brought a very different type of bidder to the takeover scene. We devote special attention in this chapter to these important trends in recent M&A history.
Merger Waves
Six periods of high merger activity, often called merger waves, have taken place in U.S. history. These periods are characterized by cyclic activity – that is, high levels of mergers followed by periods of relatively fewer deals. The first four waves occurred between 1897 and 1904, 1916 and 1929, 1965 and 1969, and 1984 and 1989. Merger activity declined at the end of the 1980s but resumed again in the early 1990s to begin the fifth merger wave. We also had a relatively short but intense merger period between 2003 and 2007.
What Causes Merger Waves?
Research has shown that merger waves tend to be caused by a combination of economic, regulatory, and technological shocks.15 The economic shock comes in the form of an economic expansion that motivates companies to expand to meet the rapidly growing aggregate demand in the economy. M&A is a faster form of expansion than internal, organic growth. Regulatory shocks can occur through the elimination of regulatory barriers that might have prevented corporate combinations. Examples include the changes in U.S. banking laws that prevented banks from crossing state lines or entering other industries. Technological shocks can come in many forms as technological change can bring about dramatic changes in existing industries and can even create new ones. Harford shows that these various shocks by themselves are generally not enough to bring about a merger wave.16 He looked at industry waves, rather than the overall level of M&A activity, over the period 1981–2000. His research on 35 industry waves that occurred in this period shows that capital liquidity is also a necessary condition for a wave to take hold. His findings also indicate that misevaluation or market timing efforts by managers are not a cause of a wave, although they could be a cause in specific deals. The misevaluation findings, however, are contradicted by Rhodes-Kropf, Robinson, and Viswanathan, who found that misevaluation and valuation errors do motivate merger activity.17 They measure these by comparing market to book ratios to true valuations. These authors do not say that valuation errors are the sole factor in explaining merger waves, but they say that they can play an important role that gains in prominence the greater the degree of misevaluation.
Rau and Stouraitis have analyzed a sample of 151,000 corporate transactions over the period 1980–2004, including a broader variety of different corporate events than just M&As. They have found that “corporate waves” seem to begin with new issue waves, first starting with seasoned equity offerings and then initial public offerings, followed by stock-financed M&A and later repurchase waves.18 This finding supports the neoclassical efficiency hypothesis, which suggests that managers will pursue transactions when they perceive growth opportunities and will engage in repurchases when these opportunities fade.
First Wave, 1897–1904
The first merger wave occurred after the depression of 1883, peaked between 1898 and 1902, and ended in 1904 (Table 2.1). Although these mergers affected all major mining and manufacturing industries, certain industries clearly demonstrated a higher incidence of merger activity.19 According to a National Bureau of Economic Research study by Professor Ralph Nelson, eight industries – primary metals, food products, petroleum products, chemicals, transportation equipment, fabricated metal products, machinery, and bituminous coal – experienced the greatest merger activity. These industries accounted for approximately two-thirds of all mergers during this period. The mergers of the first wave were predominantly horizontal combinations (Table 2.2). The many horizontal mergers and industry consolidations of this era often resulted in a near monopolistic market structure. For this reason, this merger period is known for its role in creating large monopolies. This period is also associated with the first billion-dollar megamerger when U.S. Steel was founded by J. P. Morgan, who combined Carnegie Steel, founded by Andrew Carnegie and run by Carnegie and Henry Clay Frick, with Federal Steel, which Morgan controlled. However, Morgan also added other steel companies, such as American Tin Plate, American Steel Hoop, American Steel Sheet, American Bridge, American Steel and Wire, International Mercantile Marine, National Steel, National Tube, and Shelby Steel Tube. Combined under the corporate umbrella of U.S. Steel, the company controlled one-half of the U.S. steel industry.20 The resulting steel giant merged 785 separate steel-making operations. At one time, U.S. Steel accounted for as much as 75 % of U.S. steel-making capacity.
Table 2.1 First Wave, 1897–1904
Source: Merrill Lynch Business Brokerage and Valuation, Mergerstat Review, 1989.
Table 2.2 Mergers by Types, 1895–1904
Source: Neil Fligstein, The Transformation of Corporate Control (Cambridge, MA: Harvard University Press, 1990), 72.
Besides U.S. Steel, some of today's great industrial giants originated in the first merger wave. These include DuPont, Standard Oil, General Electric, Eastman Kodak, American Tobacco (merged with Brown and Williamson in 1994, which in turn merged with RJ Reynolds in 2004), and Navistar International (formerly International Harvester but became Navistar in 1986 when it sold its agricultural business). While these companies are major corporations today with large market shares, some were truly dominant firms by the end of the first merger wave. For example, U.S. Steel was not the only corporation to dominate its market. American Tobacco enjoyed a 90 % market share, and Standard Oil, owned by J. D. Rockefeller, commanded 85 % of its market. In the first merger movement, there were 300 major combinations covering many industrial areas and controlling 40 % of the nation's manufacturing capital. Nelson estimates that in excess of 3,000 companies disappeared during this period as a result of mergers.
By 1909, the 100 largest industrial corporations controlled nearly 18 % of the assets of all industrial corporations. Even the enactment of the Sherman Antitrust Act (1890) did not impede this period of intense activity. The Justice Department was largely responsible for the limited impact of the Sherman Act. During the period of major consolidation of the early 1900s, the Justice Department, charged with enforcing the Act, was understaffed and unable to aggressively pursue antitrust enforcement. The agency's activities were directed more toward labor unions. Therefore, the pace of horizontal mergers and industry consolidations continued unabated without any meaningful antitrust restrictions.
By the end of the first great merger wave, a marked increase in the degree of concentration was evident in U.S. industry. The number of firms in some industries, such as the steel industry, declined dramatically, and in some sectors only one firm survived. It is ironic that monopolistic industries formed in light of the passage of the Sherman Act. However, in addition to the Justice Department's lack of resources, the courts initially were unwilling to literally interpret the antimonopoly provisions of the Act. For example, in 1895, the U.S. Supreme Court ruled that the American Sugar Refining Company was not a monopoly and did not restrain trade.21 At this time, the Supreme Court was not concerned by the fact that
Mark Mitchell and J. H. Mulherin, “The Impact of Industry Shocks on Takeover and Restructuring Activity,”
Jarrad Harford, “What Drives Merger Waves,”
Matthew Rhodes-Kropf, David T. Robinson, and S. Viswanathan, “Valuation Waves and Merger Activity: The Empirical Evidence,”
Panambur Raghavendra Rau and Aris Stouraitis, “Patterns in the Timing of Corporate Event Waves,”