A Historical Analysis of M&A Waves
Business consolidations are now a part of the global business landscape. News about this conglomerate acquiring that company, or that business merging with this business are quite commonplace already. In 2015 alone, consolidations of businesses through mergers and acquisitions have surpassed the $3 trillion mark, and the year is not yet over.
There are three major types of business combinations: consolidation, merger, and acquisition. In a statutory consolidation, two or more companies decide to create a new company, resulting in the dissolution of the previous companies. In this article, we will focus primarily on the other two types, 1) mergers and acquisitions – M&A, for short, as well as 2) historical M&A waves.
MERGERS AND ACQUISITIONS
M&A is the general term that is used to describe that aspect of management that deals with buying, selling and combining companies and business entities. It is mostly involved in business consolidations whereby two forms of business combinations – merger (M) and acquisition (A) – are applied.
There have been many mistakes in the past where the two are used interchangeably, as if they are one and the same. They are both business amalgamation forms, yes, but they are also markedly different, although often used together in one term.
A merger is the type of business combination where two companies join together to form a new company. It takes place when one company (the surviving company) takes over another company (the merged company). The purposes of a merger are any, or all, of the following: increase of overall competitive advantage, revenue growth, business growth, entry into new markets, and cost reduction.
In this type of business combination, the two companies may be of differing sizes, although it could also happen that they are around the same size, hence the phrase “merger of equals”. A classic example would be the DaimlerChrysler Company, which was formed when two originally separate companies – Daimler-Benz and Chrysler – agreed to move forward as single, united company, instead of staying as separate entities both in management and operations. It is often done through purchase and surrender of stocks.
In an acquisition type of business combination, one company is purchased by another company. Unlike in a merger, there is no new company formed, because the purchasing company (the owner) is retained and merely absorbs the other company that it has purchased or acquired. The acquired company also retains its identity as a business entity, but it will now be under the control of the acquiring company.
HISTORICAL M&A WAVES
M&A has been around for a very long time; it is no longer a new concept that has just been introduced in the business world. It has started making its presence felt as early as the latter part of the 1800s, and the increasing competitiveness in the global business landscape was largely instrumental in its widespread application.
The evolution of M&A is broken down in six stages or “waves”, and we will look into those waves in the succeeding discussion.
First Wave (1893-1904)
The first wave of M&A came to be known as the “great merger movement” in the US business scene, particularly the manufacturing sector. This wave was characterized by horizontal mergers, where firms that operate within the same industry or field – often as competitors or rivals – combine together. This is often brought about by larger corporations that are aiming for more efficient economies of scale since the companies joining together are providing the same products or services. Thus, forming trusts became the norm. This was particularly attractive to companies that wanted to establish monopolies and market dominance, seeing as the combinations resulted to larger combined market shares.
The period between 1893 and 1904, and immediately before the beginning of World War I, saw the rise of manufacturing and transportation giants in the United States, particularly in the industries of steel, oil, mining and railroads. The telephone industry also benefited from horizontal mergers.
The prime examples of horizontal integration during the first wave included:
- Standard Oil Company of New Jersey (1899). This American oil and gas company was founded in 1870 but officially became a trust as the “New Jersey Holding Company” in 1899.
- United States Steel Corporation (1901). This steel company was founded in 1901 by merger/buyout of Carnegie Steel Company, Federal Steel Company, National Steel Company and J.P. Morgan. This made it the largest steel producer, as well as the largest corporation, in the whole world at the time.
- International Harvester Corporation (1902). IHC is a prime American manufacturer of machinery and equipment for agricultural and construction purposes, and commercial and household products. It was formed with the merger by J.P. Morgan of five agricultural equipment firms, including the Deering Harvester Company and the McCormick Harvesting Machine Company.
Second Wave (1919-1929)
The monopolies created through horizontal integration during the First Wave resulted to the government intervening and enacting laws that ban or prohibit what they referred to as “anticompetitive behavior”. Case in point: the Standard Oil Company was ruled as an illegal monopoly by the US Supreme Court in 1911. This led to the company switching over to vertical integration, which was the identifying facet of the Second Wave of the M&A
Vertical mergers are more efficiency-oriented; rather than increasing revenue, the goal is to reduce costs and improve a company’s overall efficiency. This type of merger involves two companies that are not competitors but collaborators, in the sense that they used to purchase from each other in the past. Thus, it is a common sight to see a bidder or buyer expanding the company’s operations towards the resources (upstream) or the end-user (downstream).
An example would be a company that sells raw materials used by another company in its manufacturing processes. The cost of finding suppliers and distributors, as well as the costs involved in negotiations with third parties will be eliminated since the companies are already joined. The major benefit in this type of merger can be felt in the supply and logistics divisions.
One effect of this M&A wave was oligopolies taking the place of monopolies. The companies that were not able to get a piece of the action during the First Wave were left to merge with other businesses or acquire other companies in order to remain competitive with the bigger players created during the first wave. This wave ended during the Great Depression and the crash in 1929.
The major players were automobile manufacturers, with Ford and FIAT leading the pack. The oil and gas industry also adapted during the second wave, as evidenced by the Standard Oil Company moving from horizontal to vertical integration, expanding its operations to oil refining, retailing and marketing.
Third Wave (1955-1970)
Expansion and diversification became the main drivers of the decisions made by companies when the Third Wave rolled around. When neither horizontal nor vertical integrations provided the solutions that these large companies were looking for, they turned their attention to conglomerate mergers and acquisitions.
Conglomerate mergers and acquisitions involve companies or corporations that belong to various fields of business, often unrelated to each other. They do not have to belong to the same industry or space, and their products or services may be vastly different or have nothing to do with one another.
This Wave was spurred by the desire of US corporations to enter new markets and diversify their revenue streams. Therefore, holding companies and conglomerates cropped up left and right.
It did not last long, however. 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.
One of the major names that resulted during the Third Wave was the General Electric Company. Originally, it rode the Second Wave when it absorbed the National Electric Lamp Association (NELA) and made it a major component of its lighting division.
Fourth Wave (1974-1989)
The Fourth Wave saw the arrival of corporate raiders on the scene, and hostile takeovers and congeneric mergers became commonplace.
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.
Congeneric mergers, on the other hand, take place between two companies or businesses that belong to the same industry – or in different but related industries that allow them to have synergy– but are not involved in making the same products or providing the same services.
In both cases, the companies merged or combined are involved in business in similar or related fields but do not have the same offerings to the market.
During this wave, investment banks played a more active role, willing to dole out large sums of cash in order to aid their clients – the corporate raiders – in their hostile takeover bids. It also saw the development of new markets, with the “junk” bond market being one of them. This is where bonds of companies with poor or low credit quality are being sold.
The inevitable end of the fourth wave came in 1989, when the banks ended up lending too much, too often (and it did not help that the high rates of inflation also meant the borrowing costs were too high), that they were unable to sustain their capital structures. This was aggravated even more by the crash of the stock market in 1987, where many companies were forced to close their doors.
Fifth Wave (1993-2000)
The ‘90s welcomed the entry of the “mega deals”, where businesses had displayed greater greed for bigger economies of scale. The result was the creation of multinational companies and conglomerates which have become massive. After all, they were of the belief that the bigger they are, the more dominant they will be in the market.
As such, foreign investors began entering the US market (and vice versa). The type of acquisition or merger that involves foreign investors obtaining controlling interest in the acquired or merged company became known as “cross-border mergers”. They involve two countries with the rules or laws of the Home Country (where the acquiring company is) prevailing over the acquisition and control of the acquired or merged company in the Host Country. This was seen by many businesses as the perfect opportunity to enter markets in other countries and establish dominance on an international and even global scale.
If you look at the biggest M&A deals in history, many of them took place during the Fifth Wave. One example of a cross-border merger is UK’s Vodafone AirTouch purchase of Germany’s telephone and internet giant Mannesman in 1999.
The gas and oil industry were also the ones that were active during this period, as seen in the merger of Exxon and Mobil, resulting in ExxonMobil, which is currently the largest oil refining company in the world. GlaxoSmithKline, on the other hand, was the result of the merger of Glaxo Wellcome and SmithKline Beecham, two of the top pharmaceutical companies in Europe at the time. Their merger easily made it one of the top pharmaceutical companies in the world.
But it’s not just the gas and oil industry that made a killing when the Fifth Wave rolled around. This was also when the historic merger of Daimler and Chrysler took place, as well as Ford’s acquisition of Volvo.
This wave didn’t last very long, either. It came in with a huge bang, but also went out fettered with scandals that involved the filing of bankruptcy of huge names such as Worldcom and Enron. The bursting of the dot-com bubble also sealed the deal.
Sixth Wave (2003-2008)
Globalization, private equity, and shareholder activism were the key features that characterize what took place during the Sixth Wave, which took place on the heels of the recovery period of the dotcom bubble.
Shareholders became more involved, leading to shareholder activism, where they displayed more influence and power over the actions and behavior of a corporation by the simple exercise of their ownership rights over the management. They do not directly run the company, but they do get to have a say on how the board of directors or the management run it.
Of course, this proactive stance taken by shareholders led them to take action in spreading ownership with the management and the investors of the company. This resulted to the influx of private equity.
Leveraged Buy-outs (LBOs) also became prevalent. These are mergers or acquisitions where the acquiring company borrows money in order to meet the cost of acquiring its target company, allowing them to make acquisitions or mergers without the need to commit a large amount of capital. This act of borrowing or obtaining loans to meet acquisition costs can be said as something that was left off from the Fourth Wave. This time around, though, interest rates are kept low, and private equity firms were more active in lightening the load.
Globalization became a key point in acquisitions and mergers, and more and more companies – even the larger and already established corporations – are more intent on expanding their reach to multinational and global markets. Vestiges of the cross-border mergers trend during the Fifth Wave are still strong and visible during the Sixth Wave, but with decidedly greater benefits. Government support is more readily available, and the growth of private equity funds also helped greatly.
However, in December 2007, the subprime mortgage crisis in the US, which coincided with the recession of the US economy, marked the end of the Sixth Wave.
The most popular example of a merger taking place during the Sixth Wave was that of American Online (AOL) purchasing Time Warner for US$164 billion.
Seventh Wave (2011-onwards)
Things didn’t look too good for M&A during the next few years immediately following the end of the Sixth Wave. It did not help any when AOL Time Warner reported an almost US$100 billion loss after just one year from the historic merger. The merger went on to become known as the “biggest mistake in corporate merger history”.
The year 2004 was a particularly harsh time for M&A, no thanks to the downturn that the economy took.
Still, all hope is not lost, as M&A activity seemed to start stirring in 2011, fanning flames of hope that the Seventh Wave is about to start. In this Wave, the BRICS are taking to the forefront of M&A activity. BRICS stands for Brazil, Russia, India, China, and South Africa, five of the emerging national economies of the world. They are either developing countries or have just become newly industrialized, and they also happen to be five of the most populous countries. In fact, all five countries account for more than 40% if the global population as of 2015. This cooperation among these countries are putting a lot of focus on commercial and corporate activities, and it would definitely come as no surprise when M&A activities in the coming years will be heavily concentrated in these countries or the continents they belong in.
One thing is for sure, however: we will still see trends and patterns that originally arose during the earlier Waves. Cross-border mergers and industrial consolidations will still flourish. Hostile takeovers, leveraged buy-outs, and concentric mergers will also remain to be prevalent.