Wave Of International Mergers And Acquisitions Essays - Finance

Wave Of International Mergers And Acquisitions The wave of international mergers and acquisitions experienced in both the United States and the UK in the 1980s and 1990s is known as the fourth merger and acquisition wave. The fourth wave began just as the U.S. emerged from the recession of 1981-82, which as a result of global competition had laid bare the weaknesses of traditional American center industries. In many cases, changes in markets and technology had resulted in obsolete assets and redundant personnel. The progressive deregulation of airlines, trucking, telecommunications, and banking would also reveal excess capacity in those industries. The conglomerate boom had saddled corporations with unwieldy inefficient/under-managed operations. Massive shifts in investment away from manufacturing to services, along with energy shortages, high inflation, rising interest rates, and falling unemployment had all further contributed to the most serious crisis of confidence in the American business system since the Great Depression. P ostwar corporate profits were reaching a low point, and many of the nations biggest companies were suffering from low productivity and a widely perceived loss of managerial competence. Many of these problems were addressed by the merger and acquisition wave of the 1980s. Brief History of the Merger Waves The American economy has experienced four distinct waves of mergers during the twentieth century. The first wave may be dated approximately as having taken place between 1885 and 1905. This wave consisted predominantly of horizontal mergers. Thus in this period we have an increase in concentration in industrial markets. Mergers were particularly strong in the steel, rubber and tobacco industries. The second wave may be dated approximately as having occurred during the period 1916-30, with the peak during the late 1920s. Horizontal mergers continued to be predominant, but vertical ones and conglomerate in particular started being important. Significant merger activity took place in petroleum, primary metals and food products. The third period started in the 1940s, after the Second World War. Over that period a striking change in the form of merger took place. Horizontal and vertical mergers have declined in importance while conglomerate mergers have become predominant. Fourth Wave and the Leveraged Buyout As the conglomerate wave began to ebb, a new vehicle surfaced for giving dissatisfied shareholders an opportunity to sell their stock in underperforming assets. The tender offer enabled buyers to bypass CEOs and boards of directors to appeal directly to shareholders. Typically, a tender offer gave shareholders the opportunity to sell their shares at prices substantially above the going market value, when a buyer, seeing the potential for increasing the value of the assets, was willing to pay a premium for them. In many cases, this would spell bad news for underperforming managers, who were likely to be replaced by the new owners. In other cases, buyers might retain managers, but under new restructured agreements or understandings about how the assets would be managed. Most often, the tender offer was associated with a corporate raid, or a hostile takeover attempt, that is, one resisted by the target companys board of directors. The fourth wave was different from the previous ones in that both hostile takeovers and leveraged buyouts played a significant role, stimulated by aggressive investment bankers, corporate raiders, and heightened shareholder activism. The fourth wave was also characterized by increasing foreign participation, especially following the relative decline in the value of the dollar and the reduction of federal taxes on capital gains in 1986. During the merger and acquisition boom of the 1980s, leveraged buyouts spurred a dual revolution in the American economy- one in corporate finance, another in corporate governance- that profoundly altered the patterns of managerial power and behaviour. They not only substantially improved the worth of specific firms, they also helped to change the ways in which business in general though about debt, governance, and value creation. In order to succeed, they usually required drastic reforms in operations, reallocations of capital, and dislocations of personnel. They aroused the anger of numerous interests- from corporate executives to labor unions, from local communities to bondholders- whose power, status, jobs, and other economic interests were affected by the restructurings. It should be no surprise, then, that the leveraged buyout was denounced in many quarters as just another unproductive, dangerous financial scheme. A leveraged buyout in its