Sixth Merger and Acquisition Wave After the Financial Crisis: Reasons and Effects

Introduction

Mergers and acquisitions form an integral part of today's market capitalism adopted by parties seeking improved performance. Beyond financial synergy, mergers and acquisition enable firms to diversify their portfolio, attain efficient resource allocation and economies of scale. Mergers and acquisition are forms of business amalgamation attained through buying, selling and consolidating business entities. Although used interchangeably, mergers and acquisition are markedly different in their interpretation and application. In this work, a merger is considered amalgamation attained through combining companies to establish a new entity or where two separate firms agree to operate as a united company. The acquisition is treated as the business combination where one entity purchases another. Unlike in mergers, acquisition arises where the purchasing entity continues to operate and merely absorbs the acquired entity. In a changing business environment induced by rampant globalization, fierce competition, financial conditions, and the emergence of new markets, mergers and acquisitions are inevitable. Beyond overcoming business risks, firms may join forces for various reasons as demonstrated in the preceding mergers and acquisition waves. This paper evaluates the reasons and effects of six mergers and acquisition wave testing the correlation of booms following financial crisis and economic shocks.

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Motives behind Mergers and Acquisitions

Mergers and acquisitions are guided by different rationale as demonstrated in past waves. Firstly, the efficiency theory shows mergers occur to accomplish synergies with business combination giving the firms greater value unlike when operating independently. From the efficiency theory, mergers and acquisition yield operational synergies to derive increased operating income (Krug, 2009). The business combination delivers economies of scale allowing the new entity to reduce fixed costs by removing duplicate operations. Besides portfolio diversification, mergers and acquisition enable the firms to access cheaper capital, increase specialization and efficiently allocate resources (Risberg, 2013). Again, business consolidation delivers managerial synergy supported through free cash flow theory that argues that efficient performers have resources they should utilize in the takeover.

Firms embrace business combination by absorbing major competitions to attain increased market power. Citing monopoly theory, firms embrace acquisition to expand their profit margins. In addition, managers of efficiently run firms with access to information on undervalued firms, demonstrate the information asymmetry model. They embrace the valuation theory that argues that undervalued firms are a prime target for acquisition (Krug, 2009). Some business consolidation demonstrates the empire-building theory where managers' acquisition decisions are driven by self-interest. Such managers seek mergers and acquisitions to accomplish their individual goals. Firms pursue mergers and acquisition aligned to value-maximization stipulated under the process theory as political decision-making (Faulkner, Teerikangas, & Joseph, 2012). Tax reduction during acquisition may prompt mergers financed through shares.

Mergers and acquisition may arise from industry background as demonstrated in 2007 financial crisis compelling mass write-offs and write-downs in insurance and banks. The situation necessitated government intervention to prevent the contagious collapse in the economic system and address market failures (Risberg, 2013). The government intervention led to the creation of larger financial conglomerates reflecting the application of mergers and acquisition theory. This paper evaluates the motives and effects of sixth mergers and acquisition wave after the financial crisis. Further assessment of previous mergers and acquisitions is captured.

Historical Mergers and Acquisition Waves

First Wave (1893- 1904)

The first wave identified as great merger movement featured horizontal mergers dominant in the manufacturing sector. The merger and acquisition involved business combination of firms operating within the same industry. The United State experienced rising corporate giants within transportation and manufacturing sectors before the World War I. The 1803 to 1904 horizontal mergers extended to mining and oil industries with Standard Oil Company of New Jersey becoming New Jersey Holding (DePamphilis, 2013). A merger and buyout of Carnegie Steel Company, National Steel Company, Federal Steel Company and J.P. Morgan bore United States Steel Corporation. The wave involved horizontal mergers involving firms operating within the same field targeting efficiency of economies of scale. The wave attracted companies that sought to establish monopolies. It explains the formation of International Harvester Corporation. It involved merging five agricultural equipment firms, including Deering Harvester and McCormick Harvesting Machine (Falk, 2013).

Second Wave (1919 - 1929)

The second wave featured the creation of monopolies through horizontal integration influenced by the government intervention. The wave emerged from the enactment of laws prohibiting anticompetitive behavior. The law led to the Supreme Court ruling Standard Oil Company illegal monopoly in 1911 (Krug, 2009). It forced the company to embrace vertical integration. The vertical mergers were efficiency-oriented targeting cost reduction and expanded scope. The wave featured collaborators seeking expanded scope in supply and logistics units. The effect of the second wave involved oligopolies replacing monopolies. The wave had firms missing the first wave action acquiring others and merging with collaborating firms to retain their competitiveness against the bigger players created in the first wave (Faulkner, Teerikangas, & Joseph, 2012). The second wave ended at the onset of the Great Depression and economic crash experienced in 1929. Particularly, automobile manufacturers such as Ford and Fiat led the merger and acquisition wave similar to the oil and gas sector (Nouwen, 2011). The latter involved Standard Oil Company embracing vertical integration by expanding operations to include oil refining, marketing and retailing.

Third Wave (1955- 1970)

The third wave emerged from the diversification and expansion desires with vertical and horizontal integrations unviable to offer solutions sought by large companies. Again, the firms sought conglomerate mergers. Conglomerate acquisitions involved firms from various fields, though unrelated in their operations. The mergers and acquisitions involved firms operating in different spaces and dealing in the diversified portfolio (Nouwen, 2011).The wave arose from the desire in the United States corporations seeking penetrations in new markets. In addition, the firms sought diversified revenue. It led to the sprouting of holding companies and conglomerates. A leading merger involves the General Electric Company absorbing the National Electric Lamp Association to take up lighting division (Sudarsanam, 2003). The wave would end following the share prices crash later amplified by the oil crisis in the early 1970s.

Fourth Wave (1974 - 1989)

The period, 1974 to 1989, brought corporate raiders with hostile takeovers becoming commonplace ushering conglomerate mergers. The period had the emergence of investors and financiers who sought control in companies through acquiring larger shareholdings. Congeneric mergers involved companies within the same industry to allow them to attain management synergy when providing same services and products (Faulkner, Teerikangas, & Joseph, 2012). The merging companies operated within the same business though had varying offerings to the target audience. The wave saw investment banks play more active roles in providing large sums to assist their clients in pursuing hostile takeover bids. The wave stimulated the development of new bond markets of firms with lower and poor credit ratings (Krug, 2009). Besides the junk bond market, the wave-exposed the banks to over lending. The high inflation rates brought overwhelmed the rising borrowing costs leaving most banks with unsustainable capital structures. The wave ended with the stock market crash experienced in 1987 compelling mass closure of companies.

Fifth Wave (1993 - 2000)

The fifth wave brought mega deals that characterized the 90's mergers and acquisitions with businesses exercising their desire for bigger economies of scale. Their pursuit resulted in the foundation of multinational companies riding on the belief that the larger the company the more dominant their operation in the competitive market (Nouwen, 2011). The wave allowed entry of foreign investors into the United States market. Such patterns saw US investors seeking international growth in foreign markets. The acquisition enabled foreign investors to attain controlling interest in companies through cross-border mergers. The trend saw more home country companies prevailing their management control over the acquired firms within the host country.

The wave facilitated a perfect platform where home country companies would penetrate foreign markets and establish their dominance. Such dominance extended to international levels and global scale. It highlights the cross-border merge enabling Uk's Vodafone AirTouch to acquire Mannesmann - a leading telephone and internet provider in Germany (Naik & Raghavan, 2000). Such trends extended gas and oil industry with active mergers manifested in the foundation of ExxonMobil from Exxon and Mobil. The merger produced the world largest refining company. A similar fete emerged from the merger between SmithKline Beecham and Glaxo Wellcome being two of the leading pharmaceutical firms in Eurozone. The historic merger of Daimler and Chrysler and Ford acquiring Volvo would highlight the Fifth Wave (Nouwen, 2011). The short-lived wave ended with Enron and Worldcom scandals leading to bankruptcy filings alongside the dot-com bubble burst.

Additional mergers and acquisition activities would come within heels of the dot-com bubble. It arose from increased shareholder activism and diversification response to globalization and expanding private equity. As a response to the Enron and Worldcom scandals, shareholders sought active involvement in the corporate management (McCarthy & Dolfsma, 2012). They exercised ownership rights over decisions reached by the management. Although indirectly involved in running the corporations, their input sought to observe the board performance and management decisions. The proactive stance of shareholders stimulated spread ownership causing an influx of private equity.

The wave brought prevalent leveraged buy-outs with acquiring firms borrowing funds to conclude their purchases. It allowed the acquiring companies execute the purchases without committing huge capital allocation. Different from the fourth-wave lending, borrowing costs remained low with an active participation of private equity firms lightening the burden (Kolakowski, 2017). Globalization proved important to ease pursuit of established corporations expanding their operations in the global and international markets. The wave rekindled the fifth w...