Merger and Acquisitions
...which shows itself in the long-term waves. The merger waves seem to be driven by technological, political, regulatory and economic factors, which influence the operating environment of the firms such as GDP growth, interest rate level The M&A waves in the late 19th century and 20th century have had different characteristics and drivers. The 1st recorded wave of M&A began at the end of the 19th century. This wave took place within the first capital-intensive environment, on a backbone of railroads, electricity and lax anti-trust corporation law and enforcement, formed a first group of big corporations. The result was overcapacity and the recession of 1893 , which in turn led to factory closures and increase in unemployment. The overarching characteristics of the 1st M&A wave was horizontal merger concentrated in the heavy manufacturing industries. Following the World War I, economic boom, continued development of the railroads, car manufacturing and radio transmission technology the 2nd merger occurred between 1916 and 1926. Following the enforcement and introduction of some anti-trust laws , the 2nd merger wave was mainly vertical mergers . New sectors emerged in railroads and utilities which exploited the economies of scales. The 3rd wave occurred in the period of 1965 to 1975. With the booming economy, rising stock prices and management of science development, the period was characterised by industrial mass production in consumer goods. The firms sought to gain economies of scale, diversification of product by acquiring firms from other markets. The period saw the creation of conglomerate. The merges were primarily financed by equity, with visionary CEOs who created conglomerates in particular in aerospace, industrial machinery, auto parts, railways, tobacco and textiles. The 4th wave, the so called “Megamerger” which was characterised by hostile takeovers in the 80s. The underlying economic factors were expanding economy, deregulation, financial innovations and active competition in the financial markets. The use of debt and junk bond to finance hostile takeovers was prevalent. It this period the oil, gas, pharmaceuticals industries were most active players in the merger world. The 5th merger wave took off amidst the global technological change, globalisation of free trade (EU), deregulation of telecommunication, financial services and energy. The very favourable rising stock market and low interest rate has fuelled the global/ cross border strategic mergers. The global mergers such as Citibank/travellers, Chrysler/Daimler Benz, Exxon/Mobile and AOL/Time Warner are a few examples of this period. Why do Firms Merge? Although the study of merger waves sheds some light on the cyclical, the underlying economic environment ad the characteristics of each period, it does not fully explain why firms merge? What motivates firms to merge? Here will try to summarise the factors that might encourage firms to merge. Firstly the natural tendency of the business firm is to grow and create monopoly and obtain the dominant position in the market. The underlying factor here is the tendency of the rate of profit to fall. Another factor that encourages M&A is the possibility of acquiring a firm with lower profit and improving on the margin and creating premium through the process of synergy and consolidation of overhead and admin staffing consolidation. In the same line of analysis the merger could be encouraged either through government policy or ...