The history of mergers and acquisitions in the United States consists of a series of five different waves of activity. Each wave occurred at a different time, and each exhibited some unique characteristics related to the nature of the activity, the sources of funding for the activity, and to some degree different levels of success from wave to wave. When the volume, nature, mechanisms and results of these transactions are viewed in an objective historical context, important experiences emerge.
The first wave
The first significant wave of merger and acquisition activities in the United States occurred between 1898 and 1904. The normal level of approx. 70 mergers a year jumped to 303 in 1898 and ran at 1,208 in 1899. It remained more than 300 each year until 1903, when it fell to 142 and fell back again to what had been an area of normality during the period of 79 mergers. , in 1904. Industries that comprised most of the activity during this first wave of acquisition and merger activity included primary metals, fabricated metal products, transportation equipment, machinery, oil products, bituminous coal, chemicals and foods. By far the biggest motivation for these actions was the expansion of the business into adjacent markets. In fact, 78% of the mergers and acquisitions that took place during this period resulted in horizontal expansion, and another 9.7% involved both horizontal and vertical integration.
In this era of American history, the business environment related to mergers and acquisitions was much less regulated and much more dynamic than it is today. There was very little use of antitrust barriers, with few laws and even less enforcement.
The second wave
The second wave of merger and takeover activity in US companies occurred between 1916 and 1929. After becoming more concerned about the rampant growth of mergers and acquisitions during the first wave, the US Congress was much more vigilant about such activities at the time the second wave rolled around. Business monopolies resulting from the first wave produced some market abuse and a set of business practices that were considered unfair by the American public. Although the Sherman Act proved to be relatively ineffective as a deterrent monopolistic practice, Congress therefore passed yet another piece of legislation entitled the Clayton Act to Strengthen the Sherman Act in 1914. The Clayton Act was somewhat more effective and proved to be particularly useful to the federal government in the late 1900s. During this second wave of activity in the years 1926 to 1930, a total of 4,600 mergers and acquisitions occurred. The industries with the highest concentration of these activities included primary metals, petroleum products, chemicals, transport equipment and food. As a result of all these consolidations, 12,000 businesses disappeared and more than $ 13 billion in assets were acquired (17.5% of the country’s total manufacturing assets).
The nature of the companies formed was somewhat different in the second wave; there was a higher incidence of mergers and acquisitions to achieve vertical integration in the second wave, and a much higher percentage of the resulting firms resulted in conglomerates that included former non-business transactions. The second wave of acquisition and merger activity in the United States ended in the stock market crisis of October 29, 1929, and this changed – perhaps forever – the perspective of investment banks related to financing these transactions. Companies that grew prominently through the second wave of mergers and acquisitions in the United States and still operating in this country today include General Motors, IBM, John Deere (now Deere & Company) and Union Carbide.
The third wave
The US economy flourished during the latter half of the 1960s (1965 to 1970), and the growth of corporate mergers and acquisitions, particularly related to conglomeration, was unprecedented. It was this economic boom that painted the backdrop for the third wave of mergers and acquisitions in American history. A particular feature of this period was the relatively common practice of companies that targeted acquisitions larger than themselves. This period is sometimes referred to as the conglomerate merger period, which is largely because acquisitions of companies with over $ 100 million in assets spiked so dramatically. Compared to the years prior to the third wave, mergers and acquisitions of companies occurred much less frequently. Between 1948 and 1960, for example, they averaged 1.3 per. Year. Between 1967 and 1969, however, there were 75 of them – an average of 25 per. Year. During the third wave, the FTC reports, 80% of the mergers occurred were conglomerate transactions.
Although the most recognized conglomerate names of this period were huge companies such as Litton Industries, ITT and LTV, many SMEs sought to pursue an opportunity for diversification. The diversification involved here included not only product lines, but also the industries in which these companies chose to participate. As a result, most of the companies involved in these activities moved significantly outside of what was considered their core business, very often with damaging results.
It is important to understand the difference between a Diversified company, which is a company with some subsidiaries in other industries, but most of its production or services within an industry conglomerate, which operates its business in multiple industries without real compliance with a single primary industry. Boeing, which primarily produces aircraft and missiles, has diversified by moving to areas such as Exostar, an online exchange for aerospace & defense companies. However, ITT has conglomerated with the industry’s leading positions in electronic components, defense electronics and services, fluid technology and motion & flow control. While the majority of companies were merged or acquired in the long line of activity that resulted in the current Boeing Company, almost all aviation and defense companies, the acquisitions of ITT were far more diverse. In fact, ITT has since taken over as an independent company in 1995, among other companies Goulds Pumps, Kaman Sciences, Stanford Telecom and C&K Components.
Since the rise of the third wave of mergers and acquisitions in the 1960s, there has been great pressure from shareholders for the company’s growth. As the only relatively easy path to this growth is the path of conglomeration, many companies pursued it. However, this pursuit was financed differently in this third wave of activity. It was not funded by investment bankers who had sponsored the previous two events. As the economy was expanding, interest rates were relatively high and the criteria for obtaining credit also became more demanding. This wave of merger and takeover activity was then carried out in the issuance of shares. Funding of the activities through the use of stock avoided tax liability in some cases, and the resulting acquisition pushed earnings per share. Share to, even though the acquiring company paid a premium for the acquired company’s share using its own stock as currency.
However, the use of this mechanism to increase EPS becomes unsustainable as larger and larger companies are involved, because the underlying assumption in using this mechanism is that the P / E ratio of the (larger) acquiring company is transferred to whole stock basis for the newly combined business. Larger acquisitions represent larger percentages of the overall business, and the market is generally less willing to give the new business the benefit of this doubt. Finally, when a large number of merger and acquisition activities based on this mechanism occur, the pool of suitable acquisition candidates is depleted and the activity decreases. This decline is largely responsible for the completion of the third wave of merger and acquisition activity.
Another mechanism that was used in a similar way and with a similar result in the third wave or merger and acquisition activity was the issue of convertible bonds (debt securities convertible into common stock) to collect the earnings of the acquired company without be required to reflect an increase in the number of shares outstanding. The resulting shock in visible EPS became known as the bootstrap effect. During my own career, I have often heard of similar tactics called “creative bookkeeping”.
Almost certainly, the most conclusive evidence that most of the conglomeration activity gained through mergers and acquisitions is detrimental to the value of the overall business is the fact that so many of them are later sold or divested. Eg. More than 60% of cross-industry acquisitions that took place between 1970 and 1982 were sold or otherwise sold in 1989. The widespread failure of most conglomerations has certainly been partly the result of overpayment for acquired companies, but the fact remains , that overpaying is the unfortunate practice for many companies. In a recent interview I conducted with an extremely successful CEO in the healthcare industry, I asked him what actions he would strongly recommend to others avoid when a merger or acquisition is made. His response was immediate and emphatic: “Do not become familiar with the acquisition target,” I replied. “Otherwise, you pay too much. The acquisition must make sense on several levels, including price.”
Thus, the lack of conglomeration largely stems from another root cause. Based on my own experience and the research I have done, I am confident that the most fundamental cause is the nature of conglomeration management. Implicit in the management of conglomerates is the notion that governance can be performed well in the absence of specialized industry knowledge, and this is usually not the case. Regardless of the “professional management” vocational curriculum offered by many higher education institutions these days, in most cases there is just no substitute for industry-specific experience.
The fourth wave
The first indications that a fourth wave of merger and takeover activity was imminent came in 1981, with almost doubling the value of these transactions from the previous year. However, the wave receded a bit and really regained some serious momentum again in 1984. According to Merger State Review (2001)slightly more than $ 44 billion was paid for by merger and acquisition in 1980 (corresponding to 1,889 transactions), compared with more than $ 82 billion (corresponding to 2,395 transactions) in 1981. While activity fell back to between $ 50 billion and $ 75 billion in The following two years, the 1984 activity represented over $ 122 billion and 2,543 transactions. In terms of peaks the number of transactions peaked in 1986 with 3,336 transactions, and dollar volume peaked in 1988 at more than $ 246 billion. Thus, the analysts are viewed as a whole by the wave of activity between 1981 and 1990.
There are a number of aspects of this fourth wave that set it apart from past activities. The first of these characteristics is the emergence of the hostile takeover. While hostile acquisitions have taken place since the early 1900s, they really did spread (more in terms of dollars than in percentage of transactions) during this fourth wave of merger and acquisition activities. In 1989, for example, more than three times as many dollars were made as a result of disputed bids than the dollars associated with uncontested bids. Some of this phenomenon was closely related to another characteristic of the fourth wave of activity; the small size and industry priority of acquisition targets during this period. Refers again to Merger State ReviewThe numbers published in 2001 were the average purchase price paid by merger and acquisition in 1970, for example $ 9.8 million. By 1975, it had grown to $ 13.9 million, and by 1980 it was $ 49.8 million. At its peak in 1988, the average purchase price paid for mergers and acquisitions was $ 215.1 million. The deterioration of the situation was the scale of large transactions. The number of transactions valued at more than $ 100 million increased more than 23 times between 1974 and 1986, a sharp contrast to the typically small to medium-sized corporate-based activities of the 1960s.
Another factor that influenced this fourth wave of merger and acquisition activity in the United States was the emergence of deregulation. Industries such as banking and oil were directly affected, as was the aviation industry. Between 1981 and 1989, five of the top ten acquisitions involved a company in the oil industry – as an acquirer, an acquisition, or both. These included the 1984 Gulf Oil acquisition of Chevron ($ 13.3 billion), the acquisition of Texaco in the same year by Getty Oil ($ 10.1 billion), the British Petroleum acquisition of Standard Oil in Ohio in 1987 ($ 7.8 billion) and acquisition of Marathon Oil by U.S. Steel in 1981 ($ 6.6 billion). Increased competition in the aviation sector resulted in a severe deterioration in the financial performance of some carriers as the airline industry was deregulated and airfares were exposed to competitive prices.
A further look at the ontology of the ten largest acquisitions between 1981 and 1989 reflects that relatively few of them were acquisitions that expanded the acquirer’s business to industries other than their core business. For example, among the five oil-related acquisitions, only two of them (DuPont’s acquisition of Conoco and U.S. Steel’s acquisition of Marathon Oil) were non-industry expansions. Even in these cases, they can be claimed to be “adjacent industry” extensions. Other acquisitions among the top ten were Bristol Meyers ’12.5 billion. Dollar acquisition of Squibb (same industry – Pharmaceutical products) and Campeau’s $ 6.5 billion acquisition Dollars by Federated Stores (same industry – Retail).
The last notable aspect of the “top 10” list from our fourth wave of acquisitions is the hallmark exemplified by the actions of Kohlberg Kravis. Kohlberg Kravis made two of these ten acquisitions (both the largest – RJR Nabisco for $ 5.1 billion and Beatrice for $ 6.2 billion). Kohlberg Kravis was representative of what became known during the fourth wave as a “corporate raider”. Corporate raiders like Paul Bilzerian, who eventually acquired the Singer Corporation in 1988 after participating in several previous “raids,” created fortunes for themselves by trying to take over the business. Oddly enough, the acquisitions ultimately needed success for the raider to profit from it; they just had to raise the price of shares they acquired as part of the takeover attempt. In many cases, raiders were actually paid (this was called “greenmail”) with company assets in exchange for the stock they had acquired in that acquisition attempt.
Another term that entered the lexicon of business during this fourth wave of acquisition and merger activity is the leveraged buy-out, or LBO. Kohlberg Kravis helped develop and popularize the LBO concept by creating a number of limited partnerships to acquire various companies that they considered to be underperforming. In most cases, Kohlberg funded Kravis up to ten percent of the acquisition price with its own capital and borrowed the rest through bank loans and high-yield bonds. Usually, the target company’s management was allowed to retain an equity interest to provide a financial incentive for them to approve the acquisition.
The bank loans and bonds used the tangible and intangible assets of the target company as collateral. Since bondholders received their interest and principal payments only after the banks were repaid, these bonds were riskier than investment grade bonds in the event of default or bankruptcy. As a result, these instruments became known as “junk bonds.” Investment banks like Drexel Burnham Lambert, led by Michael Milken, helped raise money for leveraged acquisitions. Following the acquisition, Kohlberg Kravis would help restructure the business, sell underperforming assets and implement cost-cutting measures. After achieving these efficiencies, the company was then usually sold at a significant profit.
Increasingly, as we look at the waves of acquisition and merger activities that have taken place in the United States, this seems very clear: While it is possible to benefit from the creative use of financial instruments and from the smart buying and selling of businesses, Managed as an investment portfolio, the real and sustainable growth in the value of the company, accessible through acquisitions and mergers, comes from improving the overall operating efficiency of the newly created company. Sustainable growth is the result of leverage of business-driven assets following the merger or acquisition. This improvement in asset efficiency and leverage is most often achieved when management has a fundamental commitment to the ultimate success of the company and is not motivated solely by a rapid, temporary escalation in the share price. In my opinion, this is related to the previous observation that some industry-specific knowledge improves the likelihood of success when acquiring a new business. People who are committed to the long-term success of a business tend to pay more attention to the details of their business and to a wider range of technologies and trends within their industry.
There were a few other characteristics of the fourth wave of merger and acquisition activity that should be mentioned before proceeding. First and foremost, the Fourth Wave saw the first significant effort of investment bankers and management consultants of various types in providing advice to acquisition and merger candidates to earn professional fees. For the investment bankers, there was an extra opportunity to finance these transactions. This opportunity largely gave rise to the junk bond market, which raised capital for acquisitions and raids. Second, the nature of the acquisition – and especially the nature of the acquisition – became more complicated and strategic. Both the acquisition mechanisms and paths, and the defensive, anti-acquisition methods and tools (such as the “poison pills”) became more and more sophisticated during the fourth wave.
The third feature of this category of “other unique characteristics” in the fourth wave was the increased reliance on the takeover of companies by debt, and perhaps more importantly by large amounts of debt to finance the takeover. A significant increase in the acquisition of management teams by their own companies using relatively large amounts of debt gave rise to a new era – the leveraged buyout (or LBO) – in the lexicon of the Wall Street analyst.
The fourth characteristic was the emergence of international acquisition. It is estimated that British Petroleum’s acquisition of Standard Oil for $ 7.8 billion. Dollars in 1987 marked a change in the US business landscape, signaling an expansion of the merger and acquisition landscape to include foreign buyers and foreign acquisition targets. This deal is important not only because it involved foreign ownership of what had been considered a basic US company, but also because of the large dollar volume. A number of factors were involved in this event, such as the fall of the US dollar against foreign currencies (which made US investment more attractive), and the evolution of the global marketplace where goods and services had become increasingly multinational in scope.
The fifth wave
The fifth wave of acquisition and merger activities began immediately after the US economic recession in 1991 and 1992. The fifth wave is seen by some observers as still ongoing with the obvious interruption of the tragic events of September 11, 2001 and the recovery period immediately following these events. . Others will say it ended there, and after a few years thereafter, we see the impending rise of a sixth wave. As I have no strong bias against both views, for the purpose of our discussion here, I will take the first position. Based on the value of transactions announced during the respective calendar years, the dollar amount of total mergers and acquisitions in the United States in 1993 continued $ 347.7 billion (up from $ 216.9 billion in 2002), continued grew steadily to $ 734.6 billion in 1995 and expanded further to $ 2.073.2 billion in 2000.
This group of agreements differs from the previous waves in several respects, but the main difference was probably that the acquisitions and mergers in the 1990s were more carefully orchestrated than in any previous foray. They were more strategic and were better aligned with what appeared to be relatively sophisticated strategic planning on the part of the acquiring company. This feature appears to have solidified as a primary feature of major merger and acquisition activities, at least in the United States, which is encouraging for shareholders seeking sustainable growth rather than a quick – but temporary – shock in the share price.
Another characteristic of the fifth wave of acquisitions and mergers is that they were typically more capital-based than debt-based in terms of their financing. In many cases, this worked well because it was less reliant on leverage that required short-term repayment, which allowed the new business to be more cautious and aware of asset sales to service debt created at the time of acquisition. .
However, even in those cases where both of these functions were prominent aspects of the agreement, not all have been successful. In fact, some of the biggest acquisitions have been the biggest disappointments in recent years. For example, just before the announcement of AOL’s acquisition of Time Warner, a share of AOL’s common stock is being traded for around $ 94. In January 2005, this share of the value was worth approximately $ 17.50. In the spring of 2003, the average stock price was more like $ 11.50. The AOL Time Warner merger was financed with the AOL share, and when the expected synergies were not realized, both the capital value and the shareholder’s value came to mind. What was not expected was the devaluation of the AOL shares used to finance the acquisition. As analyst Frank Pellegrini reported in Time’s online edition on April 25, 2002: “Staying out of AOL Time Warner’s fairly humdrum revenue report Wednesday was a very scary number: a one-time loss of $ 54 billion. It’s the biggest waste of red ink, the dollar for dollars in U.S. corporate history and nearly two-thirds of the company’s current stock market value. ”
The fifth wave has also become known as the “roll-up” wave. A roll-up is a process that consolidates a fragmented industry through a series of acquisitions of relatively large companies (typically already within that industry) called consolidation groups. While the most widely recognized of these mergers took place in the funeral business, retailers of office products and floral products, there were significant size mergers in other industries, such as discrete segments of the space and defense community.
Finally, the fifth wave of acquisitions and mergers was the first, with a very large percentage of total global activity taking place outside the United States. In 1990, the volume of transactions in the United States was $ 301.3 billion, while the United Kingdom had $ 99.3 billion, Canada had $ 25.3 billion, and Japan represented $ 14.2 billion. In the year 2000, the tide changed. While the US still led by $ 2.073 billion, England had risen to $ 473.7 billion, Canada had grown to $ 230.2 billion and Japan had reached $ 108.8 billion. By 2005, it was clear that participation in global merger and acquisition activity was now someone’s grass. According to barternews.com: “There was incredible growth globally in the M&A arena last year with a record volume of $ 474.3 billion from the Asian and Pacific region, up 46% from $ 324.5 billion in 2004. In the US, M&A volume rose 30% from $ 886.2 billion in 2004. In Europe, that figure was 49% higher than $ 729.5 billion in 2004. Eastern European activity nearly doubled to a record $ 117.4 billion. ”
Many studies have been conducted focusing on historical mergers and acquisitions, and a great deal has been published on this topic. Most of the focus of these studies has been on more modern transactions, probably due to factors such as the availability of detailed information and a presumed increase in the relevance of recent activity. Before sifting through the overall wisdom of the legion of more modern studies, I think it is important to at least look briefly at the historical patterns reflected earlier in this article.
What lessons can be learned that can look at the chances of success in future M&A activity, looking back at this long history of mergers and acquisitions, and observing the relative successes and failures and characteristics of each wave of activity. Here are ten of my own observations:
- Silver bullets and statistics. The successes and failures that we have reviewed during this chapter reveal that virtually any merger or acquisition is subject to incompetence for execution and for ultimate failure. There is no combination of market segments, management methods, financial backing or environmental factors that can guarantee success. While there is no “silver bullet” that can guarantee success, there are approaches, tools, and circumstances that serve to increase or decrease the statistical probability of achieving sustainable long-term growth through an acquisition or merger.
- The ACL life cycle is crucial. The companies that achieve sustainable growth through acquisitions and mergers as a key pillar of their business strategy are those who consciously move through the Acquisition / Commonization / Leverage (ACL) lifecycle. We saw evidence of this activity in the case of U.S. Steel, Allied Chemical, and others during this review.
- Integration failures often spell disaster. Failure to achieve the entire business through assembly lines of basic business processes and their support systems can leave even the largest and most established companies vulnerable to market failure over time. We saw a number of examples of this situation where the American Sugar Refining Company was perhaps the most representative of the group.
- Environmental factors are critical. As we saw in our review of the first wave, factors such as the emergence of a robust transportation system and strong, robust manufacturing processes enabled success for many industrial mergers and acquisitions. So it was recently with the advent of information systems and the Internet. Effective strategic planning in general and effective due diligence specifically should always include a thorough understanding of the business environment and market trends. Often, acquisition of executives remains excited about the acquisition goal (as mentioned in our review of the activity in Third Waves) and ignores contextual issues as well as basic business relationships that should be warning signs.
- Conglomeration is challenging. There were repeated examples of the challenges associated with conglomeration in our review of the history of mergers and acquisitions in the United States. While it is possible to survive – and even thrive – as a conglomerate, the odds are largely against it. The acquisitions and mergers that most often succeed in achieving sustainable long-term growth are those involving management with significant industry-specific and process-specific expertise. Recall the remark during our review of Fourth Wave Activity that “the most conclusive evidence that the bulk of conglomeration activity gained through mergers and acquisitions is detrimental to the value of the overall business is the fact that so many of them are later sold or sold. “
- Commonality has value. Achieving significant commonality in basic business processes and the information systems that support them allows for genuine synergy and creates a significant barrier to market competitiveness. We saw this several times; Allied Chemical is particularly illustrative.
- Objectivity is important. As we saw in our review of the influence of investment bankers who veto questionable agreements during activities in the second wave, there is considerable value in advising objective outsiders. A suitable advisor not only brings a clear head and fresh eyes to the table, but often introduces important evaluative expertise as a result of experience with other similar transactions, both within and outside the industry involved.
- Clarity is critical. We saw the importance of clarity about the expected impact of business decisions in our review of the application of the DuPont model and similar tools that enabled the rise of General Motors. Applying similar methods and tools can provide valuable insight into what financial results can be expected as a result of proposed acquisition or merger transactions.
- Creative accounting is a mirror. Den slags kreative regnskab, der er beskrevet af en anden forfatter som “finansiel gimmickry” i vores gennemgang af tredje bølgeaktivitet, skaber ikke bæredygtig værdi i virksomheden, og kan faktisk vise sig at være ødelæggende for virksomheder, der bruger det som grundlag for deres fusion eller erhvervelse aktivitet.
- Forsigtighed er vigtig, når man vælger finansielle instrumenter til finansiering af M & A-transaktioner. Vi observerede en række tilfælde, hvor oppustede aktieværdier, gældsinstrumenter med høj rente og andre tvivlsomme valg resulterede i en enorm devaluering i den resulterende virksomhed. Det mest illustrerende eksempel var måske den nylige AOL Time Warner-fusion, der blev beskrevet i gennemgangen af aktiviteten i den femte bølge.
Mange af disse lektioner fra historien er tæt beslægtede og har en tendens til at styrke hinanden. Sammen giver de en vigtig ramme for forståelse af, hvilke typer erhvervelser og fusioner der mest sandsynligt vil lykkes, hvilke metoder og værktøjer der sandsynligvis vil være mest nyttige, og hvilke handlinger der mest sandsynligt mindsker virksomhedens evne til bæredygtig vækst efter M&A transaktion.