History About Merger & Acquisition?
Before going in to the history of merger & acquisition we have to learn about some terminologies and types about merger and acquisition such as
Types of Merger & Acquisition:
There are three types of M&A i.e.
>Horizontal
>Vertical
>Conglomerate
Horizontal: In horizontal m&a the same or similar line of two companies are engaged.
Vertical : In Vertical Integration where the different stages of the production chain amalgamate.
Conglomerate: Conglomerate merger is that in which two firm are combined of unrelated business areas.
Acquisition can be friendly or hostile.
Friendly:Where the purchase is approved by the board of directors before it actually takes place. This is the most transparent and convenient way.
Hostile:A hostile acquisition/takeover occurs where the board refuses the offer but the buyer tries to purchase the entity anyway by purchasing the controlling amount of shares.
Companies can grow in two way:firstly organically or by acquisiton,amalgamation,merging of other company.M&A come in waves. If we looked at the back then we know that M&A have evolved in six waves.According to Martynova and Renneboog(2008) there are six M&A wave starting from, 1890-1903,1910-1929,1950-1973,1981-1989,1993-2001,and 2003-2007.Their research shows that the end of a wave typically coincides with a crisis or a recession for example the most recent wave of sub-prime debt crisis or housing crisis in 2007.The macro economic play a vital role in making merger & acquisistion which include the monetary policies, Interest rate,GDP etc.Three factors that trigger or making the M&A since the end of 19th century;technology change,credit availabliity and regulatory changes.
First wave: The 1890's and the early 1900 is the first wave of Merger & Acquisition. During this time merger occurred between companies who enjoyed monoply over the line of production i.e. railline, electricity etc. for example formation of standard oil company of jersey in 1899, united state steel corporation 1901 and international harvester corporation 1902. The first wave M&A occurred between heavy manufacturing industies.
Most of the first wave of M&A didn't concieved the desire efficeincy.The failure was due to the failure of slowdown of economy in 1903 followed by stock crash in 1904.The legal framework was not supportive and the supreme court passed the mandate to stop the anticompetitive merger using the sherman act.
Sherman Act "The Sherman Anti-Trust Act was the first Federal act that outlawed monopolistic business practices. The Sherman Antitrust Act of 1890 was the first measure passed by the U.S. Congress to prohibit trusts."
After the government enacted laws prohibiting anti competitive behaviour, acquisition oriented companies turned in to vertical integration.Vertical integration is perhaps best illustrated by the oil and gas industry,companies that began pure oil exploration business moved into refining.
Second Wave: The second merger wave begin in 1916-1929 focused on the mergers between oligopolies rather than monoplies.The economic boom that followed the World War 1 give rise to these mergers.Those companies that mergered one another to gain economies of scale and to be able to compete with the dominant player in their field.The second wave of integration were the producer of primary metal,food product,petroleum,chemical.The investment banks played a very important role in making this merger. The second merger & acquisition came into an end in1929 because of stock market crash and great depression.The activity of merger and acquisition is very low till 1950s because of world war 2.
Third Wave: The third stage/wave of merger and acquisition started in 1965-1969 were mainly conglomerate mergers.Mergers activity was at peak around this time this is because of high stock prices,interest prices and strict enforcement of antitrust laws. The bidder firm was smaller than the target company in the third integration. In third waves mergers were financed from equities,the investment bank no longer played an important role. In third wave integration,companies tried to divesifies their revenue stream and in doing so to reduce their percieved riskness.General Electric is a typical example of third wave merger & acquisition.Merger & Acquisition saw a peak in 1968 and collapsed in 1973 because of Oil crisis.The 3rd wave ended with the attorney general to split conglomerate in 1968.It was also due to the poor performance of the conglomerate.Some mergers in 70's have set precedence.The most prominent one were INCO-ESB Merger:United Technologies and otis Elevator;and Colt Industries and Garlock Industries.
Fourth Wave: The fourth wave of integration started in1981-1989. According to the historical data the late 70's and the early 80's were characterized by high inflation and consequently high borrowing costs.At that time most firm reduce both operating and financing costs to remain profitable.In fourth wave companies merged with or acquire to one another to take advantage of the economies of scale mostly associated with larger-volume producers. In fourth generation most of the companies saw M&A as a means to reduce the riskness and lower their financing costs, which reached as high as 25percent to 30 percentin the late 70's and early 80's. The merger in 4th wave took place between oil& gas,Pharmaceutical,Banking and airline industries. The 80's were also marked with the deregulation and the introduction of new instrument in the market. One example is the "junk" bond market issued by companies with poor credit quality.The stock market crash in 87's and the collapse of highly leveraged companies put an end to this fourth wave of M&A.The fourth generation also affected by the gulf war.
Fifth Wave: The fifth wave started in (1992-2000) and that period, the economy was booming, stock market booming and deregulation.The fifth wave mainly taking place in banking and telecom sector.They were equity financed rather then debt financed.The motives of 5th wave merger were seeing long term profit rather then short term profit.
