the history of mergers and acquisitions 28th jan

8/14/2019 The History of Mergers and Acquisitions 28th Jan

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The History of Mergers andAcquisitions


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Two major themes

Each of major merger movementsreflected some underlying economicor technological factors

Macroeconomic environment isimportant

GDP growth Interest rate levels Interest rate risk premiums Monetary stringency


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1st Merger Wave 1897-1904 Merging for Monopoly

Underlying Factors: Technological developments

Transcontinental Railroads

Electricity Innovations in production process

Continuous process cigarette machine

Rapid Economic Expansion

Lax anti-trust enforcement Corporation laws relaxed Voluntary code of ethical behavior


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Characteristics of 1st wavemergers:

Horizontal mergers

Heavy manufacturing industry

These resulting industrialconsolidations led to creation of large

monopolies.

US Steel founded by J P Morganmerged with Carnegie Steel

founded by Andrew Carnegie. The

merged firm US Steel also acquiredseveral other smaller steel

producers and the resulting giantcaptured 75%of the steel market of

United States.

Standard Oil owned by John DRockfeller commanded 85% of the

market share.


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Reasons for ending 1stwave:

Majority of mergers failed didntachieve increase in efficiency

Economic recession in 1903

Stock market crash in 1904

Supreme court ruled in 1904 thatSherman Act* could be used to attack anticompetitive mergers

The era of easily availability of finance, a basic ingredient for takeover, ended resulting in thehalting of the first wave.

Further the application of anti-trustlegislations, which was hitherto lax,become more rigorous.

The federal Government under the stewardship of President Theodore Roosevelt (nick named trust buster)and subsequently under President William Taft made amajor crackdown on large monopolies.

Standard Oil was broken into 30 companies such as Standard Oil of NewJersey (subsequently renamed Exxon), Standard Oil of New York(subsequently renamed Mobil), Standard Oil of California (subsequentlyrenamed Chevron) and Standard Oil of Indiana (subsequently renamedAmoco)

Some of current corporate leaders likeGeneral Electric (GE), Du Pont,

Eastman Kodak,Navistar International are products of the first wave.

*Mudit, Ankur and Ankit - to find out the salient featuresof this Act.


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2nd Merger Wave 1916-1929 Merging for Oligopoly

Underlying Factors: Post-World War I economic boom Lax margin requirements

Technological developments Continued development of railroad Motor vehicle transportation Radio

Government encouraged firms to work together during WWI, maintained this policyin 1920s

George Stigler , a winner of the Nobelprize for economics, has contrasted the

first wave as merging for monopolyand the second wave as merging for

oligopoly.


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Characteristics of 2nd wavemergers:

Produced fewer monopolies, ratheroligopolies, vertical mergers, andconglomerates (usually related)

Primary metals, petroleum products,food products, chemicals, andtransportation equipment were themost active M&A industries

Used significant proportion of debt to

finance deals Investment banks played central rolein financing (as in 1st wave)

The anti-trust environment was stricter with the passing of Clayton Act,1914 . This resulted in several vertical mergers, wherein firms involved did

not produce the same product but had similar product lines.

Ford Motors became a verticallyintegrated company. It

manufactured its own tyres forthe cars from the rubber

produced from its own plantationsin Brazil. Further the bodies for

the car were made from the steel,produced from its own steel

plants. The steel plants in turngot iron ore from Fords own

mines and shipped on its own


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Reasons for ending 2nd wave:

October 29, 1929 stock market crash Great depression

1940s Mergers motivated by tax relief No major technological changes or

dramatic development in U.S.infrastructure

The wave ended with the stock marketcrash on the Black Thursday. On 29th

October, 1929, the stock market witnessedone of the steepest stock price fall in

history.

The crash resulted in a loss of business confidence, curtailedspending and investment, thereby worsening a sharp decline after

the crash.

Firms were focusing on basic survival and maintaining their solvency

rather going for the fresh acquisitions.

corporate giants likeGeneral Motors,

International BusinessMachine( IBM), Union

Carbide, John Deere, etcare the product of this

era.


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3rd Merger Wave 1965-1969 Conglomerate Mergers

Underlying Factors: Booming economy

Rising stock prices

High interest rates

Tough antitrust enforcement

Management science developments

This wave featured a historically highlevel of merger activity. One of the

reasons for this factor is that this waveoccurred in the background of a

booming American economy


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3rd Merger Wave 1965-1969 Conglomerate Mergers

Financial manipulations

Price-earnings game Pooling of interests method of

accounting Bootstrap effect

Example to be discussed in class

The bull market in the 1960s drove stock prices higher and higher. This resulted in the shares of certain

companies getting high price/earning multiple. Potentialacquirer realized that acquisitions through stock swaps

(shares of the acquirer given in exchange for the sharesof the target company) was an innovative way to

increase earning. This led to famous boot strap game.


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Characteristics of 3rd wave:

Primarily conglomerate mergers

Some bidders smaller than targets

Primarily equity-financed investmentbanks did not play central role

Aerospace most active industry, whileindustrial machinery, auto parts, railwayequipment, textiles, and tobacco also active

CEOs with vision to create conglomerates

Reverse Merger One of the new trends

started by this wavewas the acquisition of larger companies by

smaller companies. Inthe wave prior to this,

the acquirer wasalways bigger in size

than the target.

The conglomerate formedduring this period were highlydiversified and simultaneouslyoperated in several unrelated

industries.

e.g. during the sixties ,ITT ( The original International Telephone & Telegraphwas created in 1920 ) acquired such diversified businesses like car rentalfirms, bakeries, consumer credit agencies, luxury hotels, airport parking

firms, construction firms, restaurant chains, etc.


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Reasons for ending 3rd wave:

Attorney General announced plans to crack down on conglomerates in 1968

Legislation Williams Act* Tax Reform Act

Market eventually saw through financialmanipulations

Many of conglomerates performed poorly

*Amit / Anil to discuss the silent features of this Act

in class


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1970s Precedent-settingmergers

INCO ESB United Technologies Otis Elevator

Colt Industries Garlock Industries


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4th Merger Wave 1981-1989 The Megamerger

Underlying Factors:

Expanding economy Technological developments International competition Deregulation Increased pension fund assets Financial innovations Investment banking industry much more

competitive Failure of conglomerates


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Characteristics of 4th wave:

Size and prominence of acquisitiontargets much greater than before

Oil and gas industries dominant in early1980s, while pharmaceuticals mostcommon in late 1980s; airlines andbanking also common

Foreign takeovers became common


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Heavy use of debt to pay for acquisitions

Junk bonds

More hostile takeovers Corporate raiders

Arbitrageurs Investment banks and law firms active


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Reasons for ending 4th wave:

Legislation Financial Institutions Reform, Recover, and

Enforcement Act (1989) State antitakeover legislation

Michael Milkens indictment (1989) and DrexelBurnham Lamberts bankruptcy (1990)

Gulf war


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5th Merger Wave 1992-2000 Strategic restructuring

Underlying Factors:

Expanding economy, rising stock prices

Technological developments

Globalization

Deregulation


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Emphasized longer-term strategy ratherthan immediate financial gains

More often financed with equity thandebt

Consolidation in the telecommunicationsand banking industries


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Reasons for end of 5th wave:

Bursting of stock market bubble

Economic slowdown


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Merger Trends in the UnitedKingdom

Peaks in 1968, 1972, 1989, and late

1990s

Increase in takeovers in late 1980s dueto rising stock prices, laissez-faire governmental attitude towards mergers,financial innovations


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Merger Trends in ContinentalEurope

Uncommon before 1990s, especiallyhostile takeovers

Takeovers increasing, despiteantitakeover legislation

Firms making transition from sunsetto sunrise industries

Deregulation


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Changes in CorporateGovernance in 1980s and

1990sPrior to 1980s: External corporate governance mechanisms

rarely used Institutional shareholding modest Boards provided weak monitoring of

management Large boards of directors Low percentage of directors compensation

is equity-based Management stock ownership modest Performance plans based on accounting

measures


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Changes in the 1980s:

Predominance of debt financing providedstrong financial discipline Leveraged acquisitions Leveraged buyouts (LBOs)

Managers receive substantial equity stakes LBO sponsors or investors closely monitored

and governed firms they purchased Small boards of directors Directors tend to own large equity stakes

IPOs could lead to big payoffs for LBOinvestors


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Changes in the 1980s:

Management buyouts (MBOs) Stock repurchases

Institutional shareholders stakesincreased Results: Cross-subsidization of poorly-

performing divisions stopped Excess capacity eliminated


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Changes in the 1990s publiccompanies mimicked LBOs

Managers received generous stock-option plans

New measures of managerial performance

Closer monitoring by institutional shareholders

Smaller boards of directors

Directors compensation more equity-based

Trend toward decentralization within firms


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Market vs. internal allocationof finance

Firms are experts at particulartechnologies, products, processes

Firms may not be good at producingproducts in new industries

Firms transition to new industriesmay be slow


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Market vs. internal allocationof finance

Markets may be better at identifyingnew investment opportunities

Markets can redirect capital to newindustries quickly

Management of independent firms inthe new industry is likely to be moreknowledgeable about the industry

P bli C i i i f M&A d


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Public Criticism of M&A andMarket-based Corporate

Governance Corporate raiders use their control to strip

assets from the target, make a quick profit, destroying the company in theprocess, throwing people out of work

Raiders shouldnt have the right to buy upfirms they have no idea how to run theemployees who have spent their livesbuilding up the firm should be making thedecisions



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Governance Raiders become filthy rich without

producing anything, at the expense of

hardworking people who do producesomething

The management and board of

directors can best judge whether atakeover offer is in shareholdersinterests



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Governance M&A damages the morale andproductivity of firms

Markets are far from efficient Markets are short-sighted (especially

institutional investors) Managers pressured to forego long-

term investment in favor of short-term profit

Market penalizes firms heavilyinvesting in R&D M&A market discourages managerial

risk-taking



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Governance

Divestitures (bustups) destroy firm value

Corporate debt levels have risen to dangerouslevels

High-yield (junk) bonds do not adequately

compensate investors for risk

Golden parachutes are excessive

J d f f M&A d


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Jensens defense of M&A andMarket-based Corporate

Governance: Only natural that CEOs would oppose this

system

Incumbent management may beunable/unwilling to make difficultrestructuring decisions

M&A can lead to more orderly liquidation of

assets than bankruptcy Divestitures (bustups) involve reallocationof assets to more productive uses theassets dont disappear

J d f f M&A d


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Governance:

Takeover and divestiture marketprovides a market constraint againstbigness for its own sake

M&A can discipline managers evenwithout going through with themerger

Markets are close to being efficient

J d f f M&A d


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Governance: Markets are not short-sighted

Institutional investor shareholdingnot associated with increasedtakeovers, decreased R&Dexpenditures

Firms with high R&D spending not

more vulnerable to takeovers Stock prices respond positively toannouncements of increased R&Dexpenditures

J d f f M&A d


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Governance:

High-yield bonds are fairly priced by themarket

Corporate debt level not abnormally high

Properly structured golden parachutes arevalue-enhancing

Poison pills should be banned


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the history of mergers and acquisitions 28th jan

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