The Timing of Merger Activity Reviewing the major merger movements in US FRAMEWORK Framework to consider the timing of merger

activity is provided by Coase (1937), he adressed:
y y

Factors that influence the choice between production within a firm and exchange across market transaction cost as a central choice variable Technological change as a major determinant of firm size merger activity occured as a consequence

Jensen (1993) :
y y

Economic forces associated with merger activity Related factors that influence merger activity: (a). prices especially energy price volatility, (b) legal/political/regulatory system deregulation, privatization, and free trade ratification are important change forces, (c) capital market

EARLY MERGER MOVEMENTS Common characteristics : (1). Economy experienced sustained high rates of growth, (2). Response to economic, technological, and regulation changes, (3). Favorable stock price levels and financial conditions, (4). Dominated by a particular type of merger

Horizontal mergers (1895 1904) Major changes in economic infrastructure and production technologies: o Transcontinental railroad completion resulting in national economic markets o Use of electricity and increased use of coal and oil products Motivating factors : o Economies of scale o Merging for national markets o Professional promoters and underwriters Success due to "astute business leadership" (Livermore, 1935): o Rapid technological and managerial improvements o Development of new products o Entry into new subdivisions of industry o Promotion of quality brand names o Commercial exploitation of research Causes for failures as given by Dewing (1953) o Failure to modernize plant and equipment o Increase in overhead costs o Lack of flexibility due to large size o Inadequate supply of talent to manage large groups of plants

chemicals. which resulted in high concentration in many industries. The 1904 decision of the Supreme Court in the Northern Securities case (193 U. steel and other industry multinationals was already irreversibly laid during this period. y Vertical mergers (1922 1929) Combinations in public utilities. department stores o Vertical mergers metals. The combination movement consisted mainly of horizontal mergers. Some commentators say the court decision mentioned about led to three phases of organisation of the American economy. and thus the merger activity represented to a certain extent the transformation of regional firms into national firms. The completed rail system resulted in the development of a national economic market. oil Facilitating developments : o Transportation motor vehicles made both buyers and sellers more mobile o Communications national radio advertising facilitated product differentiation o Merchandising mass distribution with low profit margins o Increased vertical integration due to advantages from technological economies or from reliability of input supply Ended with the onset of a severe economic slowdown in 1929 CONGLOMERATE MERGERS (1960s) Changes in the law : o Clayton Act of 1914. the advent of electricity and a major increase in the use of coal. had prohibited mergers only for stock transactions o Celler-Kefauver Act of 1950 closed asset-purchase loophole and granted the federal goverment additional power to declare illegal those mergers that tended to increase concentration. which prohibited every combination in the form of trust or otherwise in restraint of trade. banking. mining. General Foods.S. 197 (March 1904)) might have contributed to ending the wave. However. the foundations of many of the large oil. Accomplished with this merger wave was the completion of the transcontinental railroad system. mining Merging for oligopoly Large portion of merger represented : o Product-extension IBM. establishing that mergers can be attacked by Section One of the Sherman Act. Allied Chemical o Market-extension food retailing. including heavy manufacturing industries. Section 7. movie theaters. The decision established that mergers could be attacked successfully by Section I of the Sherman act. food processing.End of first merger movement o 1901: Merger activity began downturn as some combinations failed to realize gains o 1903: Economy went into recession o 1904: Supreme Court ruled against Northern Securities. which prohibited every combination in the form of trust or otherwise in restraint of trade The first merger wave began right after the 1883 depression in a period of rapid economic expansion. Horizontal and vertical mergers decline in relation to conglomerate mergers .

or on periphery of major industries Weston and Masinghka (1971). textiles. Conglomerates were defensive diversification to avoid: ± Sales/profit instability ± Unfavorable growth prospects ± Adverse competitive shifts ± Technological obsolescence ± Increased uncertainties in acquirer's industry Examples: Aerospace industry wide fluctuations in market demand."good managers can manage anything" End of conglomerate merger wave ± Antitrust laws ‡ Congress began to move against conglomerate firms in 1968 ‡ Suits filed by the Department of Justice arguing "mutual forbearance" ± Punitive tax laws ‡ Tax Reform Act of 1969 limited use of convertible debt to finance acquisitions ‡ EPS would have to be calculated on a fully diluted basis as if debt had been converted into common stock ± Declining stock prices THE DEAL DECADE (1981-1989) Motivating factors : o Surge in the economy and stock market beginning in mid-1982 o Impact of international competition on mature industries such as steel and auto o New industries as a result of new technologies and managerial innovations Decade of big deals : Ten largest transactions which exceeded $6 billion each reflected changes in the industry . excess capacity aggravated by entry of firms from other industries Industrial machinery and auto parts sales instability Railway equipment. tobacco. operating in fragmented industries. adopting diversification strategy outside traditional areas of interest Acquired firm characteristics : small to medium-sized. movie distribution low growth prospects Other motives ± Some mergers reflected personality of chief executive resulting in noncore acquisitions ± Some conglomerates were formed to imitate earlier conglomerates that appea red to have achieved high growth and high valuations ± Differential price/earnings (P/E) game EPS the buyer will rise ± No sound conceptual basis source of sell-offs in later years ± Rise of management theory .In 1967-1968 : the merger activity peaked Horizontal and vertical mergers declined to 17% Product extension mergers increased to 60% Pure conglomerates increased steadily to about 23% of all mergers Acquiring firm characteristics : small to medium-sized. large abrupt shifts in product mix.

Economic recovery after Gulf War . Buyers would seek firms whose parts as separate entities were worth more than the whole . changes in the nature and forms of competitive relationships . and Enforcement Act (FIRREA) in1989  Indictment of Michael Milken and bankruptcy of Drexel Burnham o Development of powerful takeover defenses o Economic recession associated with Gulf War - STRATEGIC MERGER (1992-2000) Economic trends . Bought segments of diversified firms "Bustup acquisitions" - In corporate acquisitions.Five involved oil companies increased price instability resulting from OPEC actions . a transaction in which a raider sells some of the acquired company's assets to finance the leveraged acquisition.Two involved tobacco companies diversified into food industry The ability to undertake transactions was facilitated by the financial innovations High yield bonds provided financing for aggressive acquisitions by raiders The rise of financial buyers Arranged going private transactions.Continued rise in stock prices to new highs . financial buyers.Deregulation .Globalization o Technological developments in transportation and communications o Europe and other regions moving toward common markets . segments would be divested .Recovery of junk bond market as other investment banking firms moved in Major driving forces .Two involved drug mergers increased pressure to reduce drug prices . and bustup acquisitions put pressure on business firms defend againts takeovers increased hostile takeovers End of fourth merger wave o Government actions  Highly publicized insider trading cases  Passage of the Financial Institution Reform.After acquisitions.Proceeds of sales were used to reduce the debt incurred to finance the transaction The combined impact of raiders. Recovery. referred to as LBOs.Technology o Impact of computer and software applications o Impact of microwave systems and fiber optics on telecommunications industry o Impact of the Internet creation of new industries and firms.

Major deregulations in financial services. M&As represent adjustment by industries and firms to change forces and economic turbulance TIMING OF MERGER ACTIVITY Generalizations on major merger movements ± Each major merger movement reflected some underlying economic and/or technological changes ± Some common financial factors associated with high levels of merger activity ‡ Rising stock prices ‡ Low interest rates ‡ Favorable term structures of interest rates ‡ Narrow risk premiums INDUSTRY CLUSTERING IN MERGER ACTIVITY Merger activity in a given time interval tends to cluster in specific industry Table 7.Method of payment o Predominant use of stock-for-stock transactions o Less reliance on highly leveraged transactions Size of M&As in relation to level of economic activity . M&As represented 15% of GDP . petroleum.Economic Environment o Rising stock prices o Rising P/E ratios o Low interest rate levels . o Massive reorganization of industries .For period 1993-1999. M&As represented less than 4% of GDP o MERGER ACTIVITY AFTER THE BUBBLE The dollar volume of mergers in 2001 was down 48% from 2000 For 2002 the dollar volume was estimated to be down about 40% from 2001 Outlook for 2003 was estimated to be at about the same level as in 2002 The level of M&As reflects the same influences as plant and equipment expenditures. telecommunications. energy. which had not shown a recovery by early 2003. and air transport were acquired : major forces federal deregulation. oil price 1990s : heavy merger activity in banking and telecommunications : chemical.In the eighties. trucking. petroleum producing. airlines.5 1980s : more than two thirds of the firms in industries such as broadcasting. etc. and telecommunications industries engaged in a major divesture . M&As represented about 12% of GDP .In 1999.

technological.Deregulation in the 1980s affected industries such as air transport. Underlying factors . and telecommunications INTERNATIONAL PERSPECTIVES M&A activity in other developed countries of the world has been even higher than in the U. electric utilities.Internationalization of markets . but M&A activity increased due to economic.S. and regulatory changes .Globalization of competition .Antimerger laws and regulations such as in the UK and in EEC tightened in the 1980s. natural gas. and trucking Deregulation in the 1990s affected industries such as banking.