Name: Nguyen Thi Loan

Student ID: 31181022408

Class: DH44FNC01
CHAPTER TWO :HISTORY OF MERGERS

1. MERGER WAVES

Six periods of high merger activity, often called merger waves, have taken place in U.S. history.
Characterized by cyclic activity— high levels of mergers followed by periods of relatively fewer deals.
 1st Merger Wave 1897–1904
 2nd Merger Wave 1916–1929
 3rd Merger Wave 1965–1969
 4th Merger Wave 1981–1989
Merger activity declined at the end of the 1980s
 5th Merger Wave 1994–2001
 6th Merger Wave 2004–2007

2. WHAT CAUSES MERGER WAVES

 Mitchell and Mulherin, Journal of Financial Economics (1996):

Economic shocks: economic expansion that motivates companies to expand to meet the rapidly
growing aggregate demand in the economy.
Regulatory shocks can occur through the elimination of regulatory barriers that might have prevented
corporate combinations.
Technological shocks can come in many forms as technological change can bring about dramatic
changes in existing industries and can even create new ones.
 Jarrad Harford, Journal of Financial Economics (2005):
Sufficient capital liquidity was also needed in order to have a wave – not just these shocks.
Misevaluation or market timing efforts by managers are not a cause of a wave, although they could
be a cause in specific deals.
 Matthew Rhodes-Kropf, David T. Robinson, and S. Viswanathan, Journal of Financial Economics
(2005)
Misevaluation and valuation errors do motivate merger activity.
 Panambur Raghavendra Rau and Aris Stouraitis, Journal of Financial and Quantitative Analysis (2011)
“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.
=> neoclassical efficiency hypothesis: suggests that managers will pursue transactions when they
perceive growth opportunities and will engage in repurchases when these opportunities fade.

Wave #1 Wave #2 Wave #3 Wave #4 Wave #5 Wave #6

Period 1897-1904 1916-1929 1965-1969 1981-1989 1994-2001 2004-2007
Known as Merger for Merger for Conglomerate The Strategic Globalization
Monopoly Oligopoly merger Megamerger Restructurin
g
Predominant Cash Equity Equity Cash/Debt Equity Equity / Debt
means of
payment
M&A outcome Creations of Creation of Diversification ‘Bust-up’, Cross-border Shareholder
monopolies oligopolies / conglomerate Hostile mergers, Activism,
takeovers; mega- Private
 Corporate mergers Equity, LBO
Raiding

Predominant Friendly Friendly Friendly Hostile Friendly Friendly

nature of
M&A
Beginning of Economic Economic Strengthening Deregulation Strong Dotcom
wave expansion; recovery; laws on anti- of financial economic bubble and
new laws on better competitive sector; growth; Federal
incorporation enforcement M&A's; Economic Deregulation Reserve’s
; of antitrust Economic recovery. and cheap funds
technological laws. recovery after privatization.
innovation. WW 2.

End of wave Stock market The Great Market crash Stock Burst of the The
crash; First Depression due to an oil market internet subprime
World War. crisis. crash. bubble; big crisis and the
companies’ economic
accounting recession in
scandals, 2008.
9/11 terrorist
attacks

A. THE FIRST WAVE

The first wave of mergers Occurred after the economic depression of 1883, peaked between 1898 and 1902,
and ended in 1904. Eight industries—primary metals, food products, petroleum products, chemicals,
transportation equipment, fabricated metal products, machinery, and bituminous coal—experienced the
greatest merger activity.

Firms conduct horizontal M&A transactions to capitalize on the power of the emerging market. The results
of mergers and acquisitions in this period led to monopoly in these industries. For example, some
corporations formed from this wave in the US are still giants in the global market, including: Dupont,
Standard Oil (controlling 85% of the US domestic market), America Tobacco (accounting for 90% of the
market), General Electric, Eastman Kodak and US Steel (accounting for 75% of the steel market).

In 1890 the Sherman Antitrust Act, which limits cartels and monopolies, was passed but it was not yet clear
in the beginning so the direct impact was limited (Stigler, 1950). The creation of monopolies was therefore
not being restricted.

The first wave of mergers and acquisitions lasted for only more than 10 years and then declined due to the
First World War. On the other hand, in 1904, the US Supreme Court began to apply antitrust laws to
horizontal mergers.

B. THE SECOND WAVE

As the economy and the banking system rebounded in the late 1900s, this antitrust law became a somewhat
more important deterrent to monopoly. With a more stringent antitrust environment, the second merger wave
produced fewer monopolies but more oligopolies and many vertical mergers.

Investment bankers were aggressive in funding mergers. Much of capital was controlled by small number of
investment bankers. The only option for firms desiring to expand was vertical expansion; thus this second
wave can be seen as creating oligopolistic structures.
Mergers and acquisitions are concentrated across industries and mainly vertical transactions to reduce the
dominance of the top firms, but instead the market will be dominated by two or more businesses combined.
During this period, mergers and acquisitions were largely in the automobile manufacturing industry. For
example, the automaker Ford has benefited greatly through extensive mergers and acquisitions, from M&A
between steel, railway and ship factories to M&A in the sector. iron ore and coal.

In 1929, the great crisis and recession in the US stock market slowed down the wave of mergers and
acquisitions due to the severe economic recession on a global scale.

C. THE THIRD WAVE

About 25 years after the Great Recession hit the US and spread to other countries around the globe, mergers
and acquisitions took place again. During this period, many corporations were born after mergers and
acquisitions. Some big corporations were formed through this third wave of M&A such as IT&T, LTV,
Teledyne and Litton. The purpose of these companies is to diversify business activities as well as take
advantage of the advantages of each subsidiary in different fields. On the other hand, the emergence of large
corporations after the M&A deals to capture the majority of the market's power in monopolistic industries.

The conglomerates formed during this period were more than merely diversified in their product lines. The
term diversified firms are generally applied to companies that have some subsidiaries in other industries but
a majority of their production within one industry category. Unlike diversified firms, conglomerates conduct
a large percentage of their business activities in different industries. It is notable, however, that the
beginning of this third M&A wave in the U.S. coincided with tighter antitrust regulations—regulations that
not only made horizontal expansion more difficult, but caused more firms to combine with those outside
their industries.

Investors in the bull market of the 1960s realized that stock-financed mergers were a pain-free way to raise
EPS without incurring higher tax liabilities. The P/E game occur when larger acquiring firm with higher P/E
will be an accretive transaction with smaller firm and lower P/E.

Under accounting rules that prevailed at the time, acquirers had the opportunity to generate paper gains
when they acquired companies that had assets on their books that were well below their market values.
Conlomerates found their large portfolios of undervalued assets to be particularly attractive in light of the
impact of a subsequent sale of these assets on the conglomerate’s future earnings

However, the third wave lasted only about 15 years as companies no longer enjoy the benefits of business
diversification. And the crash in share prices, amplified by the oil crisis in the first part of the 1970s, resulted
in the end of the Third Wave.

D. TRENDSETTING MERGERS OF THE 1970S

1, INCO versus ESB

2, United Technologies versus Otis Elevator

3, Colt Industries versus Garlock Industries

E. THE FOURTH WAVE

The fourth takeover wave is widely accepted to have ranged from 1980, at which time the stock market had
regained its footing after the economic recession, through 1989. It was a time of antitrust policy changes,
financial services deregulation, new financial instruments and markets, and increased technological
progress. There were also a record number of divestitures, hostile takeovers, and transactions such as
leveraged buyouts (LBOs), suggesting increased investor focus on corporate control.
The moniker “corporate raider” has been granted to any investor or financier who seeks to take control of a
business or a company by acquiring large shareholdings or a controlling interest, often in a less than
congenial manner. Hence, the term “hostile takeover”, which is a type of acquisition or merger made
without the wishes or even the consent of the owners, shareholders, or management of the company being
acquired. As the word “hostile” implies, this takeover is on the unfriendly side, and involves a lot of friction
for everyone involved.

This fourth takeover wave appears to have emerged as a result of the inefficiencies created by the previous
wave’s diversifications. The hallmarks of this wave included loosened antitrust regulations, more
competitive capital markets, and improved share- holder control. Companies began to see the benefits of
“de-diversifying” and refocusing on core business ideals. This decade also saw the rise of hostile raiders,
who were always ready to swoop in and pick off slower, less efficient companies.

To conclude, the drivers of the takeover wave of the 1980s include industrial shocks, the reining in of
managerial power, and the trend toward smaller, more nimble companies. Activity at this time was driven
further by more and stricter disclosure of corporate information and the subsequent focus on maximizing
shareholder value.

F. THE FIFTH WAVE

It is commonly accepted that the fifth takeover wave, unprecedented in both deal value and deal volume,
began in 1993. During this period, many large value import, sale and purchase contracts were signed.
Companies following trade and earnings during this period are much larger in scale than in the past and
experience globally. With the benefits gained after sales and earnings, the growing companies gain their
competitive advantage in the market. Other face, globalization, technological change, innovation and
consulting, as well as the boom in financial markets during this period spurred a wave of buying, selling and
importing. The intensity of these waves increased unprecedentedly both in value and in the number of
companies buying, selling and earning.

Greenmail is a payment by a firm to a hostile party for the firm's stock at a premium, made when the firm's
management feels that the hostile party is about to make a tender offer. Company in play means that when
raider makes an offer for a company, the stock tends to be held by arbitragers, who readily sell to the highest
bidder; results in company eventually being taken over. Roll-ups are part of consolidation process
fragmenting industries across multiple geographic markets to take advantage of national advertising and
economies of scale.

According to data from Thomson Financial Statistics Company, there were 119,035 merger and acquisition
contracts in the US during this period, in Europe there were 116,925 contracts. Compared with the 4th wave
of mergers and acquisitions, this number has increased many times. In the 4th wave of M&A, only 34,494
M&A transactions have been conducted in the US, and 12,729 in Europe. This period also represents a
global value of deals amounting to $ 20 trillion, five times the total value of wave 4. One of the hit deals and
mergers in the period This includes the merger between Citibank and Travelers, Chrysler and Daimler Benz,
Exxon and Mobil, Boeing and McDonnell Douglas, AOL and Time Warner, and between Vodafone and
Mannesmann.

However, the wave of mergers and acquisitions during this period also came to a recession when too much
information about accounting scandals from large corporations like Enron was exposed, as well as the crisis.
"Dotcom" (internet crisis) in early 2000 and the economic recession in the US then spread to European
countries during the three years from 2001 to 2003.

G. THE SIXTH WAVE

During this period mergers and acquisitions transactions focused on cross-border transactions. This 6th wave
range of mergers and acquisitions is massive across the globe. On the other hand, partners in mergers and
acquisitions are selected more carefully as well as more appropriately, rather than a strategic choice like in
the 5th wave of mergers and acquisitions.

The economy, however, was supported by the low interest rates initially set up by the Federal Reserve as a
reaction to the economic shock of 9/11 that took place at the end of the recession of 2001. For so long, many
criticized then Chairman Alan Greenspan for keeping rates down. These low rates provided the fuel for a
real estate speculative bubble that became an international bubble as an insatiable appetite for mortgage-
backed securities and other debt securitizations was created by the international investment community.
During the building boom that took place, industries linked to housing, such as manufacturing, also thrived.

The low interest rates also gave the private equity sector a big boost. For private equity investors, leveraged
acquisitions were less costly to do because the majority of the funding costs were relatively low interest rate
debt. There was also prosperity in the economy and the market, so equity capital was also readily available.

At the same time, the M&A market also tends to expand geographically when large companies in developed
economies pour money into investments in the form of acquiring small companies in developing countries.
Mergers and acquisitions in 2007 focused mainly on areas such as banking, finance; oil and gas industry,
information technology, automobile industry.

The year 2007 marked a new milestone in the highest merger and acquisition value in the world. However,
the M&A market declined soon after due to the global economic crisis that took place in late 2007 and early
2008. Mergers and acquisitions markets fell sharply in transaction value in 2008 and continued to decrease
in 2009.