Merger Activity Due in Large

¶ … merger activity due in large part to the internationalization of trade, the globalization of the transportation industry and innovations in telecommunications. Mergers have been used for a wide range of purposes, including achieving a synergistic effect, breaking up corporations that have become too large and unwieldy, and to help companies expend their market share in other regions. Over time, merger activity tends to assume a pattern of waves that can be attributed to several known factors such as severe economic shock or lax government regulatory polices, but a wide range of other factors have also been shown to contribute to the cyclical pattern of wave mergers, an issue that is the focus of this study. The primary aims of this study were to identify the presence of two distinct states of merger activity, high and low, if they existed as well as to identify the relevant factors that influence merger waves. In support of these aims, the study's objectives were to make comparative analyses of different waves. A review of the secondary data provides a basis for the study's conclusions and recommendations presented in the concluding chapter.

Table of Contents

Chapter 1: Introduction

Statement of the Problem

Aims and Objectives

Overview of the Study

Chapter 2: Literature Review

Background and Overview

Theories of Merger Waves

Empirical Evidence in Support of Merger Waves

Chapter 3: Research Design and Information Sources

Research Design

Information Sources

Chapter 4: Data Analysis

Chapter 5: Conclusions and Recommendations

Chapter 6: Reflections

IDENTIFYING and COMPARIGN RELEVANT FACTORS THAT INFLUENCE MERGER and ACQUISITION WAVES

Introduction

The 20th century may have been the most violent in human history, but it was also the "Century of the Merger." Time and again throughout the 20th century, companies opted to merge for various reasons, including responses to changes in the marketplace and governmental regulatory oversight. One of the common features that characterized the tens of thousands of mergers that took place during the 20th century was the distinctive patterns they assumed, with several major merger waves being discernible over time and from time to time. Depicted graphically, these merger waves assume distinctive peaks and troughs that are variously attributed to the business environment in which they occurred. In this regard, Knoke (2009) reports that, "The United States experienced several merger waves during the twentieth century, beginning with the 1895-1905 cycle that eliminated cut-throat competition in many manufacturing industries by creating vertically integrated production facilities under the near monopoly control of such giant corporations as U.S. Steel, DuPont, General Electric, International Harvester, Standard Oil, Pittsburgh Plate Glass, and the U.S. Rubber Company" (p. 57).

Then as now, the main goal of companies is to maximize the shareholders' value. Many business leaders believe that one of the most efficient ways to achieve this is through merger or acquisition. For the purposes of this study, merger is defined as the process where the shareholders of two or several companies decide to merge into a single company and acquisition is defined as the process where the shareholders of one company buy the ownership of another company or its assets. The increase in merger and acquisition (M&a) activity has generated a new phenomenon, which is merger wave. This phenomenon has been first observed in United States, then in United Kingdom and recently in other European countries.

While a year-by-year analysis of these merger waves indicates that major shock events such as the Great Depression or major world wars have an effect on merger activity, a comparison of these waves shows that merger waves are also sustained or constrained as the result of changes in governmental regulatory oversight, innovations in technologies, and other factors that influence business cycles. In reality, this is not surprising since surplus capital will help fuel business activity and governmental regulations will have an effect as well. In this regard, Komlenovic, Mamun and Mishra (2011) report that, "Industry aggregate mergers vary significantly with business cycle, increasing during boom and peak periods and decreasing during recessions and trough periods. In other words, business cycle positively affects merger activity" (p. 233). Likewise, Grossman (2010) recently observed that, "The periodic emergence of merger waves suggests that they wax and wane" (p. 112). Not surprisingly as well, these merger waves have been the focus of a growing amount of interest on the part of economists, lawmakers and business leaders who are interested in developing a better understanding of the effects of these merger wages on business activity and the implications of these peaks and troughs for the larger economy in which they take place, which is also the problem considered by this study and which is discussed further below.

Statement of the Problem

The historic patterns of merger waves are attributed to various factors including the ability of mergers to expand shortage capacity due to increased industry demand as well as for reducing excess capacity caused by a decline in industry demand (Komlenovic, Mamun & Mishra 2011). Furthermore, a number of models have been in an attempt to control for the constellation of capital market conditions that can invoke merger waves, including neo-classical theory, behavioral theory, Q-theory and other industry-specific determinants of mergers (Komlenovic et al. 2011). Likewise, a number of economic patterns have, over time, exhibited discernible patterns and waves in their behaviors that are associated with corresponding major economic events such as financial crises or unexpected shifts in governmental policies and the extent of regulatory oversight in place at the time (Hamilton 1989). In response to the need to better understand these correlations, a number of innovative approaches have been developed that can model these correlations in various ways. In this regard, Engle reports that, "Some use new flexible functional forms. Others are based on new data sets, particularly those using intra-daily data" (p. 41). These modeling approaches include those that are based on daily range statistics and realized volatilities and correlations including Gallo and Otranto (2007) use of regime-switching models of correlation. Despite this growing interest and a growing body of research that indicates the procyclicality of aggregate merger activities, there remains a dearth of timely studies in this area (Komlenovic et al. 2011), a gap that this study sought to help fill.

Aims and Objectives

The literature has advanced the idea that mergers follow a wave pattern. Therefore, the overarching aims of this study were (a) to identify the presence of two distinct states of merger activity, high and low, if they existed and (b) to identify the relevant factors that influence merger waves. In support of this aim, the study's objectives were to make comparative analyses of different waves using the format described below.

Overview of the Study

The organization of the study followed the guidance provided by Gratton and Jones (2003) who advise, "After an introductory chapter, most studies will include one or more chapters where you draw upon and consider theories, arguments and findings from the literature and which obviously relate in some way to your question or hypothesis" (p. 233). Therefore, Chapter 1 of the study was used to introduce the issues of interest, provide a statement of the problem and the study's aims and objectives. The second chapter presents a review of the relevant peer-reviewed and scholarly literature concerning the cyclicality of merger waves, and chapter three describes more fully the study's research design and methodology. Chapter four presents the analysis of the data collected for the study, and the penultimate chapter provides salient conclusions and recommendations based on the research. Finally, a reflections chapter concludes the study.

CHAPTER TWO:

LITERATURE REVIEW

Background and Overview

In many ways, the increased amount of merger activity over the past 200 years or so closely follows the industrialization of the world and the globalization of its markets. Merger activity has been facilitated by a wide range of governmental, technological and social forces that have combined to create situations in which mergers appear to be a good choice for corporate leaders seeking to grow their market share or improve their competitive position. Although the straightforward definition presented in the introductory chapter provides the general concept of a merger, there are other factors involved as well that should be taken into account in any analysis of mergers and acquisitions and their implications for business leaders. In this regard, according to Black's Law Dictionary (1991), a merger is "the fusion or absorption of one thing or right into another, generally spoken of a case where one of the subjects is of less dignity or importance than the other. Here the less important ceases to have an independent existence" (p. 988).

Although the "less dignified" or important entity may formally cease to exist in the newly merged entity, it is reasonable to suggest that influential and well-entrenched vestiges of its organizational culture and legacy systems will inevitably create challenges to the firm's post-merger performance. One of the more interesting issues concerning merger waves is the division of opinion about what effects the business environment has on merger activity. According to Medlen (2007), finance-dominated theories of merger activity emphasize the part played by investment-banking and how over-valued acquirers employ their stock as collateral or currency for takeover bids. Finance-dominated proponents also maintain that boom economic periods generate a more varied divergence of valuations that fuel merger activity (Medlen 2007). In this regard, Medlen concludes that, "Taken collectively, these understandings may explain some of the merger activity in booms, but they involve certain asymmetries that undercut their explanatory power. High stock valuations allow stock to be utilized as currency and collateral for takeovers; yet stock booms also make targets expensive" (p. 202). Moreover, despite the commonly held perception that mergers are a "quick and dirty" way to grow a business and achieve organizational goals, there remains a lack of convincing empirical evidence in support of this perception (Medlen 2007). As Medlen points out, an "anomalous fact about mergers concerns the lack of evidence that mergers are profitable. This fact begs the question: why then are mergers carried out with such frequency and with such large levels of capitalization?" (p. 202). Nevertheless, the synergistic effect that is associated with merger activity and the perceived ability of the merger approach to help organizations grow their market share has fueled increasing interest in determining what factors serve to influence such activity, and several theories of merger waves are discussed further below.

Theories of Merger Waves

Neoclassical Theory of Merger Waves. At present, the theory of merger waves that is most widely accepted is the neoclassical theory of merger waves. This theoretical model holds that these waves are caused by industry-specific shocks that result in reorganizations among companies competing in a given industry (Komlenovic et al. 2011). According to Komlenovic and his colleagues, "These mergers are the most efficient way to reorganize within a particular industry. A number of researchers to date have identified a positive relationship between the number of mergers in an industry and the magnitude of industry shocks that immediately precede the mergers. As a result, mergers are concentrated in a few industries at a time" (2011, p. 240). Likewise, Ahern and Weston (2010) report that, "Traditionally, mergers and acquisitions (M&as) have been defined to be the purchase of entire companies or specific assets by another company. In more general terms, this implies that a new combination of existing assets is formed. Neoclassical economic theory predicts that the new combination will be more productive than the sum of its parts; hence, synergy gains will be realized" (p. 5).

The research to date provides substantial support for the neoclassical theory; however, industry shocks in isolation from other precipitating events may not be a primary cause of merger waves (Komlenovic et al. 2011). Therefore, it is reasonable to suggest that industry specific shocks are positively associated with aggregate industry mergers (Komlenovic et al. 2011). Neoclassical theories, though, do not provide the robustness needed to capture the long-term performance of acquirers, a constraint that is addressed by the behavioral theory of merger discussed further below.

Behavioral Theories of Merger Waves. Although the goal of the behavioral theories of merger waves is essentially the same as the neoclassical model, the behavioral theories differ in that they seek to explain why high market valuation (e.g., high market to book, high price to earnings) coincides with increased merger activity. According to Komlenovic and his associates, "One of the popular behavioral theories, overvaluation theory, asserts that managers of the overvalued firms take advantage of mispricing by acquiring undervalued firms; therefore, merger waves are driven by the relative valuation of firms" (p. 240). Similarly, Ito and Rose (2009) report that, "Stock market overvaluation promotes corporate managers to acquire relatively undervalued firms. This 'behavioral' hypothesis also suggests that higher share prices cause merger waves" (p. 273).

Likewise, the overvaluation theory maintains that stock acquirers are more overvalued compared to cash acquirers, and that cash-acquired targets are less undervalued compared to their stock-acquired counterparts (Komlenovic et al. 2011). The implications of this theory for merger waves is that "dispersion of market valuation are likely to positively influence industry-level merger activity" (Komlenovic et al. 2011, p. 240). In other words, investors with sufficient liquidity to avoid having to resort to cash alternatives for financing will experience less favorable returns on their investments, in general, compared to their cash-flush counterparts. In this regard, Komlenovic and his associates point out that following the announcement of mergers, "acquirers using stock to finance mergers experience negative long run abnormal returns, while acquirers who use cash experience positive long run abnormal returns" (p. 240). The perception of boom times may therefore spur additional merger activity in the expectations that the boom will continue without interruption, but this perception is comparable to the gambler's fallacy but it nevertheless has played out in real-world situations time and again in ways that influence merger waves. As Komlenovic and his colleagues conclude, "In general, overvalued acquirers perform worse regardless of the way that mergers are financed. Acquirers overestimate the targets' value (and synergy) in times when the market is overvalued and underestimate it in times when the market is undervalued. Therefore, is it reasonable to suggest that overvaluation measures will positively affect industry-level merger activity" (2011, p. 240). Likewise, it is also reasonable to suggest that during periods of economic boom, investors may respond in ways that contribute to increased merger activity, a phenomenon that is discussed further below.

Markov-Switching Model

A number of economic activities demonstrate discernible patterns and waves in their behaviors that are associated with corresponding major economic events such as financial crises or unexpected shifts in governmental policies (Hamilton 1989). In response to the need to better understand these correlations, a number of innovative approaches have been developed that can model these correlations in various ways. In this regard, Engle reports that of these, some employ innovative modeling approaches that rely on data sets that are created for the purpose, especially data sets that use intra-daily information (Hamilton 1989). These modeling approaches include those that are based on daily range statistics and realized volatilities and correlations including Gallo and Otranto (2007) use of regime-switching models of correlation.

In the Markov-Switching Model formulated by Hamilton (1989), conditional densities are governed by parameter vectors, the value of which depends on the state (i.e., expansion or contraction), with state transitions governed by a first-order Markov process (Dewatripont, Hansen & Turnovsky 2003). According to Hargreaves (1994), "The Markov switching model is useful because of the potential it offers for capturing occasional but recurrent regime shifts in a simple dynamic econometric model" (p. 283). The use of the Markov-Switching Model for analyzing merger waves, though, also has some constraints. For instance, Hargreaves emphasizes that, "Existing treatments restrict the transition probabilities to be constant over time; that is, the probability of switching from one regime to the other cannot depend on the behaviour of underlying economic fundamentals" (1994, p. 283). These constraints suggest that a more robust model for merger waves might be developed by including an analysis of companies' Q. ratios as discussed further below.

Q-Theory of Merger Waves. The same type of events that precipitated the Great Depression in 1929 and ended a major merger wave in the United States have been the cause of other cyclical changes in merger activity and some economists suggest that these can best be explained in terms of the Q-theory of merger waves. This theory is based on the overvaluation theory and maintains that as a company's Q. ratio increases, its investment rate rise as well as making it more profitable for it to acquire other companies (Komlenovic et al. 2011). According to Medlen (2003), "Tobin argued that stock market booms encourage new investment" (p. 967). This assertion is fairly obvious and intuitive, Tobin suggests, who writes: "It is common sense that the incentive to make new capital investments is high when the securities giving title to their future earnings can be sold for more than the investments cost" (1996, p. 14). In his analysis of major merger wave that took place at the fin de siecle (the third such wave for England but the first such merger wave for the United States as shown in Table 2 below), Medlen reports that, "This ratio of the market valuation of firms to their replacement costs has been dubbed Q. And has been utilized extensively since the late 1950s to model new investment expenditures. It has also been used to explain takeover mania by egregious undervaluations relative to the fundamental value of the underlying assets" (2003, p. 968).

The empirical evidence to date does appear to indicate that changes in companies' Q. ratio has a more profound impact on mergers and acquisitions compared to direct investment, moreover, companies that have higher Q. ratios are typically more inclined to acquire companies that have lower Q. ratios; however, the association of this ratio with unrelated mergers remains unclear (Komlenovic et al. 2011).

A number of additional salient controls may also have varying effects on industry merger activity that are not included in any particular theory; however, the research to date indicates that the following are also important determinants of industry merger activity:

1. Industry concentration ratio,

2. Industry capacity utilization;

3. Excess cash; and

4. Proxies of financing constraints including the weighted average of debt to equity ratio and the log of cash (Komlenovic et al. 2011).

Although there has been growing interest in using these different assumptions for analyzing merger waves, there remains a lack of empirical studies that can confirm or refute their efficacy. Despite this paucity, there are a few on-point studies available that have examined these issues and these studies are discussed further below.

Empirical Evidence in Support of Merger Waves

Citing the paucity of timely and relevant research in this area, Komlenovic and his associates evaluated the effect of business cycle on industry-level merger activity in a sample of industry aggregate mergers using the Chicago Fed National Activity Index (CFNAI) as a proxy of business cycle. The results of this study showed that, overall, "industry aggregate mergers vary significantly with business cycle, increasing during boom and peak periods and decreasing during recessions and trough periods" (Komlenovic et al., 2011, p. 241). In many ways, these findings are fairly intuitive given that periods of economic boom will be characterized by surplus capital and investors eager to invest it, an assertion that is supported by these researchers' conclusion that: "In other words, business cycle positively affects merger activity" (Komlenovic et al. 2011, p. 241). Whether merger activity positively affects profitability, though, remains more questionable. In fact, an analysis of merger activity for the past 80 years conducted by Medlen (2007) found a lack of evidence for profitability. In fact, in many cases, mergers resulted in negative outcomes with reduced profitability (Medlen 2007). According to Medlen, "In one recent large study encompassing a sample of 12,023 acquisitions by public firms from 1980 to 2001, the researchers found the average dollar change in the wealth of acquiring-firm shareholders when acquisition announcements are made was negative" (p. 202). The growing body of research in this area also shows mixed results over time concerning the issue of profitability as the result of mergers (Medlen 2007).

Other trends discerned from this study included the fact that while merger intensity differs from industry to industry, these mergers are pro-cyclical and create wave patterns as a result, but behavioral and neoclassical theories of merger waves fail to capture all of the variation of industry-level mergers over time (Komlenovic et al. 2011). The results of the analysis by Komlenovic and his associates showed that a one-point increase in the standard deviation in the proxy of business cycle "increases related merger activity between 0.049% and 0.110%, and the same variation in the proxy of business cycle increases unrelated merger activity between 0.124% and 0.232%." (Komlenovic et al. 2011, p. 241).

An analysis of merger activity in Europe and the United States conducted by Kay (1999) identified a new trend in mergers during the 1990s and may have an effect on future merger activity as well as companies continue to seek a competitive advantage in an increasingly competitive and globalized marketplace. In this regard, Kay reports that, "A new feature of more recent mergers, particularly in Britain and the United States, is the degree to which they are justified by the acquiror's claim that he can make better use of the assets which he purchases. This issue is most clearly posed in hostile take-over bids. The acquiror appeals over the heads of incumbent management to the shareholders of the concern which it wishes to purchase. This is the operation of the market for corporate control" (p. 156). While hostile takeovers and other leveraged buyout approaches appear to have largely originated and predominated in the United States, the same trends are emerging in Europe as well. For example, Kay (1999) adds that,

"Hostile bids in Europe are principally a British phenomenon -- although de Benedetti's unsuccessful attack on Societe Generale de Belgique may mark the start of a growing continental European trend -- but the theme of better asset management is increasingly common in all mergers" (p. 156).

The results of a study by Ahern and Weston (2007) showed that mergers and acquisitions frequently provide companies with a valuable method whereby firms can achieve a competitive advantage and deliver superior returns to their shareholders. In support of this assertion, Ahern and Weston cite various empirical studies that found that those companies achieving the highest annual excess returns where those that had completed the most mergers and acquisitions (Ahern & Weston 2007). Based on their review of successful mergers Ahern and Weston report that there are two fundamental requirements involved:

1. The price must be right.

2. Integration must be effective.

Beyond the foregoing, Ahern and Western (2007) identified several other key aspects of a conceptual framework that provides informed strategic merger decisions which are set forth in Table 1 below.

Table 1

Strategic Fit to Improve Synergy Post-Merger

Strategic Fit Application

Description

Operations synergy

The focus of this source of strategic fit synergy is how the post-merger firm will integrate functional activities. Operations synergy can be created through economies of scale and/or economies of scope.

R&D/Technology Synergy

To create synergies through this type of strategic fit, firms seek to link activities associated with research and development (R&D) processes and the technologies that often are critical to them. The sharing of R&D programs, the transfer of technologies across units, products, and programs, and the development of new core businesses through access to private innovative capabilities (i.e., innovation capabilities that are available in the newly created firm but unavailable to the general market and to competitors) are examples of activities firms try to link to create synergy

Marketing-Based Synergy

Synergy is created through this type of strategic fit when the firm successfully links various marketing-related activities including those related to the sharing of brand names as well as distribution channels and advertising and promotion campaigns.

Management/Managerial Synergy

These strategic fit synergies are typically gained when competitively relevant skills that were possessed by managers in the formerly independent companies or business units can be transferred successfully between units within the newly created company

Source: Adapted from Hitt et al. 2001, pp. 89-94

The different ways that companies can use mergers to achieve their strategic goals are provided below.

Major principles and aspects of a conceptual framework for informed strategic merger decision making

Successful mergers must take place within the framework of a firm's strategic planning processes.

Mergers encompass the use of multiple methods of adjustments, including divest, ally, invest, share repurchases, leveraged buyouts.

The multiple adjustments are made repeatedly over extended time periods.

Mergers alone cannot create a strong firm.

To achieve higher returns to shareholders than its comparison firms requires an effective organization and the development of a strong portfolio of growth opportunities.

The firm must have strength in markets in which its core capabilities give it a competitive advantage.

In each market area the firm must achieve competitive leadership or divest the segment.

The combination of internal programs and mergers are required for continued leadership.

The firm must have a group of officers that develop experience in all forms of mergers and continuously react with the top executive.

All segments of the firm must recognize its multiple strategies and make contributions to overall results based on boundary-less interactions.

Continuous reviews of managers based on their plans, programs and executions must be conducted by the top executives.

Managers who do not execute must be replaced.

Executive compensation must be based on performance meaningfully measured.

The chairman and/or president needs to interact continuously to provide inspiration and executive development.

The system must select and develop managers with dedication, passion, and leadership.

Source: Ahern & Weston 2007, p. 6

CHAPTER THREE:

RESEARCH DESIGN and INFORMATION SOURCES

Research Design

This study used an exploratory research design to identify what modeling methods are commonly used to evaluate merger waves and to determine their respective strengths and weaknesses. To this end, the study used a review of the literature approach that drew on secondary resources following the guidance provided by Mauch and Park (2003). According to Dennis and Harris (2002), "Secondary data are information that has been collected earlier for a different purpose, but which may still be useful to the research project under consideration" (p. 39). This research design is also congruent with numerous social researchers who emphasize the need to review the literature to determine what is known in order to formulate new insights and opinions. In this regard, Fraenkel and Wallen (2001) note that, "Researchers usually dig into the literature to find out what has already been written about the topic they are interested in investigating. Both the opinions of experts in the field and other research studies are of interest. Such reading is referred to as a review of the literature" (p. 48). Likewise, Gratton and Jones (2003) suggest that a review of the relevant literature is an essential component of virtually any type of research project:

No matter how original you think the research question may be, it is almost certain that your work will be building on the work of others. It is here that the review of such existing work is important. A literature review is the background to the research, where it is important to demonstrate a clear understanding of the relevant theories and concepts, the results of past research into the area, the types of methodologies and research designs employed in such research, and areas where the literature is deficient. (p. 51)

Similarly, Wood and Ellis (2003) cite the ability of a well-conducted literature review to identify gaps in the body as knowledge among the valuable outcomes that are achievable with this research design:

1. It helps describe a topic of interest and refine either research questions or directions in which to look;

2. It presents a clear description and evaluation of the theories and concepts that have informed research into the topic of interest;

3. It clarifies the relationship to previous research and highlights where new research may contribute by identifying research possibilities which have been overlooked so far in the literature;

4. It provides insights into the topic of interest that are both methodological and substantive;

5. It demonstrates powers of critical analysis by, for instance, exposing taken for granted assumptions underpinning previous research and identifying the possibilities of replacing them with alternative assumptions;

6. It justifies any new research through a coherent critique of what has gone before and demonstrates why new research is both timely and important.

In this area, Silverman (2005) also cites the ability of a well conducted literature review to achieve several valuable outcomes, including formulating answers to the following questions:

1. What do we know about the topic?

2. What do we have to say critically about what is already known?

3. Has anyone else ever done anything exactly the same?

4. Has anyone else done anything that is related?

5. Where does your work fit in with what has gone before?

6. Why is your research worth doing in the light of what has already been done?

Finally, Gratton and Jones (2003) emphasize that, "The literature review should not just be a list of all of the literature you have discovered, rather it should be a critical appraisal of existing work, and you should be explicit as to how your study is related to, or has emerged from this literature" (p. 233). The sources for the literature review used in this study are described further below.

Information Sources

This study drew on secondary peer-reviewed and scholarly literature as well as available merger activity data reported therein. This approach is congruent with Babbie (1990) who advises, "Scientific research should not be equated with the collection and analysis of original data. In fact, some research topics can be examined through analysis of data already collected and compiled" (p. 31). The secondary resources were analyzed qualitatively as well as quantitatively to identify salient factors related to merger activity as well as discernible merger waves. The costs associated with this enterprise were modest, and involved a premium charge for the online research service used (Questia). One of the main limitations of this research design is the potential for researcher bias to influence the findings and their interpolation. In this regard, Karimov, Brengman and Van Hove (2011) caution that, "Any research synthesis contains some inherent bias because of the inclusion and exclusion criteria and the methods chosen to review the literature" (p. 273). Because all of the resources used were secondary, there were no ethical considerations involved in the collection or analysis of the data.

CHAPTER FOUR:

ANALYSIS and FINDINGS

This chapter presents an overview of merger activity in England and the United States during the 19th and 20th century, with corresponding merger activity figures included and presented in tabular and graphic format where they were available. Table 2 below provides the merger activity discussion for England, followed by a corresponding analysis for the United States in Table 3.

Table 2

Merger Activity in England: 1830s-1925.

Years

Description

1830s

Legislation of 1833 allowed the formation of non-note-issuing joint stock banks within a 65-mile radius of London. A boom in the 1830s followed by a banking crisis (1836 -- 39) contributed to the mergers wave. A large majority of mergers involved joint stock banks taking over private banks.

1860s

The Companies Act (1862) introduced limited liability which made it easier for banks to raise capital with which to undertake mergers. The crisis of 1866 gave further impetus to mergers. The majority of mergers involved joint stock banks absorbing private banks.

1880s -- 1925

Heavy merger activity, encouraged by the low interest rate environment of the late 1880s and as part of a retrenchment following the Baring crisis. There was an increase in regional consolidations, mergers to promote firm growth, and mergers to counter competition later in this period. By this time, most mergers involve joint stock banks as both bother acquirers and targets. Treasury Committee on Bank Amalgamations (Colwyn Committee), appointed in 1917, discourages further mergers.

There have also been several discernible waves of mergers in the United States to date, each of which was characterized by cyclic activity wherein high levels of mergers were followed by lower levels and so forth (Gauglian 1999). A brief description of these five merger waves and their suspected corresponding causes are set forth in Table 3 below.

Table 3

Five Cyclical Waves of Mergers in the United States

Wave

Description

1883-1904

This wave, described by some economists as a period of "merging for monopoly," took place following the Depression of 1883 and peaked in 1899 (see Figure 1 below). The Stock Market Crash of 1904 helped to end the first wave.

1916-1929

This wave was characterized by greater access to capital following the end of World War I wherein several industries were consolidated during this wave that resulted in oligopolistic rather than monopolistic structures. While merger activity affected all industries, the primary metals, petroleum products, chemicals, transportation and food products industries were especially affected by mergers during this period. During the war, merger activity was facilitated by lax antitrust regulations and policies that encouraged mergers as being a more efficient approach to support the war effort, a process that was reversed after the end of the war until the Great Depression ended this wave. During its peak, a total of 4,600 mergers took place in the U.S. from 1926 to 1930 in this wave. Legislation in 1918 eased mergers of two national banks (previously liquidation and de novo incorporation had been necessary). The McFadden Act (1927) also served to fuel additional mergers of state and national banks as well as the rapid economic growth and stock market advances in the late 1920s were also conducive to merger activity (Grossman 2010, p. 320). As Kay (1995) points out, though, "In the 1920s, plants in many sectors of industry were clearly too small and rationalization was necessary to enable modern production methods to be applied in larger production units" (p. 156).

1965-1969

The third wave of merger activity was the highest in U.S. history, fueled in large part by a booming economy and mergers of major conglomerates (accounting for fully 80% of mergers during this period), prompting some economists to call this period the "conglomerate merger period" (see Table 3 and Figure 2 below). A decline in the stock market and tax reforms reduced the incentive to merge near the end of this wave. Other economic forces were influential during this period in American (and English) history as well that affected merger activity. For instance, according to Kay (1995), during the 1960s, "Merger activity was intense in the United States, while continental European economies distantly reflected the experience of their Anglo-Saxon competitors. The emphasis on economies of scale and size was common to the 1960 merger wave" (p. 156). However, Kay (1995) also points out that there was a significant difference between the merger wave of the 1960s and previous merger waves such as the one during the 1920 when many industrial sectors were still too small to achieve the economies of scale that would be realized during this decade. .

1981-1989

The downward trends that characterized merger activity in the years preceding this wave were rapidly reversed beginning in 1981 (see Table 4 and Figure 3 below). This wave was largely marked by relatively modest rates of inflation rates throughout the 1980s as well as being a period of hostile mergers. This merger wave was also differentiated from past waves of mergers by two primary factors: (a) the size of the targets and (b) the motivational factors behind some of the acquisitions (Davis 1993). In this regard, Davis (1993) reports that during the early 1980s, governmental regulations concerning antitrust were eased which paved the way for mergers in some industries such as oil and gas as well as the aviation industry (Davis 1993). According to Davis, "Since 1980, antitrust enforcement has been relaxed, lowering the barriers to large intra-industry mergers (e.g., in the oil and airline industries); most state antitakeover laws were invalidated by the Supreme Court in 1982; and there have been great improvements in takeover technology, including the availability of financing at an unprecedented level and an increasingly sophisticated supply of legal and financial advisors" (p. 584).