Mergers and acquisitions

Mergers and acquisitions

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Encyclopedia
Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...

 dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.

Acquisition



An acquisition is the purchase of one business or company by another company or other business entity. Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not listed on public stock markets. An additional dimension or categorization consists of whether an acquisition is friendly or hostile.

Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its outcome.

Whether a purchase is perceived as being a "friendly" one or a "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees and shareholders. It is normal for M&A deal communications to take place in a so-called 'confidentiality bubble' wherein the flow of information is restricted pursuant to confidentiality agreements. In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's board
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...

 has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become "friendly", as the acquiror secures endorsement of the transaction from the board of the acquiree company. This usually requires an improvement in the terms
Bargaining
Bargaining or haggling is a type of negotiation in which the buyer and seller of a good or service dispute the price which will be paid and the exact nature of the transaction that will take place, and eventually come to an agreement. Bargaining is an alternative pricing strategy to fixed prices...

 of the offer and/or through negotiation.

"Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover
Reverse takeover
A reverse takeover or reverse merger is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public...

. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets.

There are also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications:
  • The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going concern
    Going concern
    A going concern is a business that functions without the threat of liquidation for the foreseeable future, usually regarded as at least within 12 months.-Definition of the 'going concern' concept:...

    , this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment.
  • The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage. A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders.


The terms "demerger
Demerger
Demerger is a form of corporate restructuring in which the an entity's business operations are segregated into one or more components. It is the converse of a merger or acquisition....

", "spin-off" and "spin-out" are sometimes used to indicate a situation where one company splits into two, generating a second company separately listed on a stock exchange.

As per knowledge-based views, firms can generate greater values through the retention of knowledge-based resources which they generate and integrate. Extracting technological benefits during and after acquisition is ever challenging issue because of organizational differences.
Based on the content analysis of seven interviews authors concluded five following components for their grounded model of acquisition:
  1. Improper documentation and changing implicit knowledge makes it difficult to share information during acquisition.
  2. For acquired firm symbolic and cultural independence which is the base of technology and capabilities are more important than administrative independence.
  3. Detailed knowledge exchange and integrations are difficult when the acquired firm is large and high performing.
  4. Management of executives from acquired firm is critical in terms of promotions and pay incentives to utilize their talent and value their expertise.
  5. Transfer of technologies and capabilities are most difficult task to manage because of complications of acquisition implementation. The risk of losing implicit knowledge is always associated with the fast pace acquisition.


Preservation of tacit knowledge, employees and literature are always delicate during and after acquisition. Strategic management of all these resources is a very important factor for a successful acquisition.

Increase in acquisitions in our global business environment has pushed us to evaluate the key stake holders of acquisition very carefully before implementation. It is imperative for the acquirer to understand this relationship and apply it to its advantage. Retention is only possible when resources are exchanged and managed without affecting their independence.

Distinction between mergers and acquisitions


Although often used synonymously, the terms merger and acquisition mean slightly different things.This paragraph does not make a clear distinction between the legal concept of a merger (with the resulting corporate mechanics, statutory merger or statutory consolidation, which have nothing to do with the resulting power grab as between the management of the target and the acquirer) and the business point of view of a "merger", which can be achieved independently of the corporate mechanics through various means such as "triangular merger", statutory merger, acquisition, etc.
When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place.For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline
GlaxoSmithKline
GlaxoSmithKline plc is a global pharmaceutical, biologics, vaccines and consumer healthcare company headquartered in London, United Kingdom...

, was created.
In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations; therefore, by describing the deal euphemistically
Euphemism
A euphemism is the substitution of a mild, inoffensive, relatively uncontroversial phrase for another more frank expression that might offend or otherwise suggest something unpleasant to the audience...

 as a merger, deal makers and top managers try to make the takeover more palatable. An example of this would be the takeover of Chrysler
Chrysler
Chrysler Group LLC is a multinational automaker headquartered in Auburn Hills, Michigan, USA. Chrysler was first organized as the Chrysler Corporation in 1925....

 by Daimler-Benz
Daimler-Benz
Daimler-Benz AG was a German manufacturer of automobiles, motor vehicles, and internal combustion engines; founded in 1926. An Agreement of Mutual Interest - which was valid until year 2000 - was signed on 1 May 1924 between Karl Benz's Benz & Cie., and Daimler Motoren Gesellschaft, which had...

 in 1999 which was widely referred to as a merger at the time.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly (that is, when the target company does not want to be purchased) it is always regarded as an acquisition.

Business valuation


The five most common ways to valuate a business are
  • asset valuation,
  • historical earnings valuation,
  • future maintainable earnings valuation,
  • relative valuation
    Relative valuation
    Relative valuation is a generic term that refers to the notion of comparing the price of an asset to the market value of similar assets. In the field of securities investment, the idea has led to important practical tools, which could presumably spot pricing anomalies...

     (comparable company & comparable transactions
    Comparable transactions
    Comparable transactions is one of the conventional methods to value a company for sale. The main approach of the method is to look at similar or comparable transactions where the acquisition target has a similar business model and similar client base to the company being evaluated...

    ),
  • discounted cash flow
    Discounted cash flow
    In finance, discounted cash flow analysis is a method of valuing a project, company, or asset using the concepts of the time value of money...

     (DCF) valuation


Professionals who valuate businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. The information in the balance sheet or income statement is obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an Audit
Audit
The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation.- Accounting...

.

Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's sake. There are other, more detailed ways of expressing the value of a business. While these reports generally get more detailed and expensive as the size of a company increases, this is not always the case as there are many complicated industries which require more attention to detail, regardless of size.

Financing M&A


Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:

Cash


Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.

Stock


Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter.

Which method of financing to choose?


There are some elements to think about when choosing the form of payment. When submitting an offer, the acquiring firm should consider other potential bidders and think strategically. The form of payment might be decisive for the seller. With pure cash deals, there is no doubt on the real value of the bid (without considering an eventual earnout). The contingency of the share payment is indeed removed. Thus, a cash offer preempts competitors better than securities. Taxes are a second element to consider and should be evaluated with the counsel of competent tax and accounting advisers. Third, with a share deal the buyer’s capital structure might be affected and the control of the buyer modified. If the issuance of shares is necessary, shareholders of the acquiring company might prevent such capital increase at the general meeting of shareholders. The risk is removed with a cash transaction. Then, the balance sheet of the buyer will be modified and the decision maker should take into account the effects on the reported financial results. For example, in a pure cash deal (financed from the company’s current account), liquidity ratios might decrease. On the other hand, in a pure stock for stock transaction (financed from the issuance of new shares), the company might show lower profitability ratios (e.g. ROA). However, economic dilution must prevail towards accounting dilution when making the choice. The form of payment and financing options are tightly linked. If the buyer pays cash, there are three main financing options:
  • Cash on hand: it consumes financial slack (excess cash or unused debt capacity) and may decrease debt rating. There are no major transaction costs.
  • It consumes financial slack, may decrease debt rating and increase cost of debt. Transaction costs include underwriting or closing costs of 1% to 3% of the face value.
  • Issue of stock: it increases financial slack, may improve debt rating and reduce cost of debt. Transaction costs include fees for preparation of a proxy statement, an extraordinary shareholder meeting and registration.


If the buyer pays with stock, the financing possibilities are:
  • Issue of stock (same effects and transaction costs as described above).
  • Shares in treasury: it increases financial slack (if they don’t have to be repurchased on the market), may improve debt rating and reduce cost of debt. Transaction costs include brokerage fees if shares are repurchased in the market otherwise there are no major costs.


In general, stock will create financial flexibility. Transaction costs must also be considered but tend to have a greater impact on the payment decision for larger transactions. Finally, paying cash or with shares is a way to signal value to the other party, e.g.: buyers tend to offer stock when they believe their shares are overvalued and cash when undervalued.

Specialist M&A advisory firms


Although at present the majority of M&A advice is provided by full-service investment banks, recent years have seen a rise in the prominence of specialist M&A advisers, who only provide M&A advice (and not financing). These companies are sometimes referred to as Transition companies
Transition companies
Transition companies are professional mergers and acquisitions companies that assist middle market business owners in the transition from one person’s ownership to another...

, assisting businesses often referred to as "companies in transition." To perform these services in the US, an advisor must be a licensed broker dealer, and subject to SEC (FINRA) regulation. More information on M&A advisory firms is provided at corporate advisory
Corporate advisory
Corporate advisory refers to the activity of advising organisations, including corporations, institutions and government bodies, on mergers and acquisitions and other transactions that involve a change in ownership of a company or business...

.

Motives behind M&A


The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance:
  • Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.
  • Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products.
  • Increased revenue
    Revenue
    In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

     or market share
    Market share
    Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...

    : This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.
  • Cross-selling
    Cross-selling
    Cross-selling is the action or practice of selling among or between established clients, markets, traders, etc. or the action or practice of selling an additional product or service to an existing customer. This article deals exclusively with the latter meaning. In practice, businesses define...

    : For example, a bank
    Bank
    A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

     buying a stock broker
    Stock broker
    A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...

     could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.
  • Synergy
    Synergy
    Synergy may be defined as two or more things functioning together to produce a result not independently obtainable.The term synergy comes from the Greek word from , , meaning "working together".-Definitions and usages:...

    : For example, managerial economies such as the increased opportunity of managerial specialization. Another example are purchasing economies due to increased order size and associated bulk-buying discounts.
  • Tax
    Tax
    To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

    ation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.
  • Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below).
  • Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry
    Information asymmetry
    In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure...

     or by combining scarce resources.
  • Vertical integration
    Vertical integration
    In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or service, and the products combine to...

    : Vertical integration occurs when an upstream and downstream firm merge (or one acquires the other). There are several reasons for this to occur. One reason is to internalise an externality
    Externality
    In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...

     problem. A common example of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. Following a merger, the vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.
  • "Acqui-hire
    Acqui-hire
    The term Acqui-hire is used to refer to those Mergers and acquisitions in which the chief target of the acquisition is not the company or the product, but the people building the product....

    ": An "acq-hire" (or acquisition-by-hire) may occur especially when the target is a small private company or is in the startup phase. In this case, the acquiring company simply hires the staff of the target private company, thereby acquiring its talent (if that is its main asset and appeal). The target private company simply dissolves and little legal issues are involved. Acqui-hire
    Acqui-hire
    The term Acqui-hire is used to refer to those Mergers and acquisitions in which the chief target of the acquisition is not the company or the product, but the people building the product....

    s have become a very popular type of transaction in recent years.
  • Absorption of similar businesses under single management: similar portfolio invested by two different mutual funds (Ahsan Raza Khan, 2009) namely united money market fund and united growth and income fund, caused the management to absorb united money market fund into united growth and income fund.


However, on average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity. Therefore, additional motives for merger and acquisition that may not add shareholder value include:
  • Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger. (In his book One Up on Wall Street, Peter Lynch memorably termed this "diworseification".)
  • Manager's hubris
    Hubris
    Hubris , also hybris, means extreme haughtiness, pride or arrogance. Hubris often indicates a loss of contact with reality and an overestimation of one's own competence or capabilities, especially when the person exhibiting it is in a position of power....

    : manager's overconfidence about expected synergies from M&A which results in overpayment for the target company.
  • Empire-building
    Empire-building
    In political science, empire-building refers to the tendency of countries and nations to acquire resources, land, and economic influence outside of their borders in order to expand their size, power, and wealth....

    : Managers have larger companies to manage and hence more power.
  • Manager's compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive
    Perverse incentive
    A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequences.- Examples :...

     to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders)..

Effects on management


A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that mergers and acquisitions destroy leadership continuity in target companies’ top management teams for at least a decade following a deal. The study found that target companies lose 21 percent of their executives each year for at least 10 years following an acquisition – more than double the turnover experienced in non-merged firms. If the businesses of the acquired and acquiring companies overlap, then such turnover is to be expected; in other words, there can only be one CEO, CFO, et cetera at a time.

M&A research and statistics for acquired organizations


Given that the cost of replacing an executive can run over 100% of his or her annual salary, any investment of time and energy in re-recruitment will likely pay for itself many times over if it helps a business retain just a handful of key players that would have otherwise left.

Organizations should move rapidly to re-recruit key managers. It’s much easier to succeed with a team of quality players that you select deliberately rather than try to win a game with those who randomly show up to play.

Brand considerations


Mergers and acquisitions often create brand problems, beginning with what to call the company after the transaction and going down into detail about what to do about overlapping and competing product brands. Decisions about what brand equity to write off are not inconsequential. And, given the ability for the right brand choices to drive preference and earn a price premium, the future success of a merger or acquisition depends on making wise brand choices. Brand decision-makers essentially can choose from four different approaches to dealing with naming issues, each with specific pros and cons:
  1. Keep one name and discontinue the other. The strongest legacy brand with the best prospects for the future lives on. In the merger of United Airlines
    United Airlines
    United Air Lines, Inc., is the world's largest airline with 86,852 employees United Air Lines, Inc., is the world's largest airline with 86,852 employees United Air Lines, Inc., is the world's largest airline with 86,852 employees (which includes the entire holding company United Continental...

     and Continental Airlines
    Continental Airlines
    Continental Airlines was a major American airline now merged with United Airlines. On May 3, 2010, Continental Airlines, Inc. and UAL, Inc. announced a merger via a stock swap, and on October 1, 2010, the merger closed and UAL changed its name to United Continental Holdings, Inc...

    , the United brand will continue forward, while Continental is retired.
  2. Keep one name and demote the other. The strongest name becomes the company name and the weaker one is demoted to a divisional brand or product brand. An example is Caterpillar Inc.
    Caterpillar Inc.
    Caterpillar Inc. , also known as "CAT", designs, manufactures, markets and sells machinery and engines and sells financial products and insurance to customers via a worldwide dealer network. Caterpillar is the world's largest manufacturer of construction and mining equipment, diesel and natural gas...

     keeping the Bucyrus International
    Bucyrus International
    Bucyrus International, Inc. , was an American surface and underground mining equipment company. Founded as Bucyrus Foundry and Manufacturing Company in Bucyrus, Ohio, in 1880, Bucyrus moved company headquarters to South Milwaukee, Wisconsin in 1893. In its early history, Bucyrus produced steam...

     name.
  3. Keep both names and use them together. Some companies try to please everyone and keep the value of both brands by using them together. This can create a unwieldy name, as in the case of PricewaterhouseCoopers
    PwC
    PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....

    , which has since changed its brand name to "PwC".
  4. Discard both legacy names and adopt a totally new one. The classic example is the merger of Bell Atlantic with GTE
    GTE
    GTE Corporation, formerly General Telephone & Electronics Corporation was the largest independent telephone company in the United States during the days of the Bell System....

    , which became Verizon Communications
    Verizon Communications
    Verizon Communications Inc. is a global broadband and telecommunications company and a component of the Dow Jones Industrial Average...

    . Not every merger with a new name is successful. By consolidating into YRC Worldwide
    YRC Worldwide
    YRC Worldwide Inc. is the holding company for a portfolio of brands including YRC, YRC Reimer, New Penn, USF Holland and USF Reddaway. YRC Worldwide has a comprehensive network in North America with local, regional, national and international capabilities...

    , the company lost the considerable value of both Yellow Freight and Roadway Corp.


The factors influencing brand decisions in a merger or acquisition transaction can range from political to tactical. Ego can drive choice just as well as rational factors such as brand value and costs involved with changing brands.

Beyond the bigger issue of what to call the company after the transaction comes the ongoing detailed choices about what divisional, product and service brands to keep. The detailed decisions about the brand portfolio are covered under the topic brand architecture
Brand architecture
Brand architecture is the structure of brands within an organizational entity. It is the way in which the brands within a company’s portfolio are related to, and differentiated from, one another...

.

The Great Merger Movement


The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. It is estimated that more than 1,800 of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated. The vehicle used were so-called trusts
Trust (19th century)
A special trust or business trust is a business entity formed with intent to monopolize business, to restrain trade, or to fix prices. Trusts gained economic power in the U.S. in the late 19th and early 20th centuries. Some, but not all, were organized as trusts in the legal sense...

. In 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from 1998–2000 it was around 10–11% of GDP. Companies such as DuPont
DuPont
E. I. du Pont de Nemours and Company , commonly referred to as DuPont, is an American chemical company that was founded in July 1802 as a gunpowder mill by Eleuthère Irénée du Pont. DuPont was the world's third largest chemical company based on market capitalization and ninth based on revenue in 2009...

, US Steel, and General Electric
General Electric
General Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...

 that merged during the Great Merger Movement were able to keep their dominance in their respective sectors through 1929, and in some cases today, due to growing technological advances of their products, patents, and brand recognition by their customers. There were also other companies that held the greatest market share in 1905 but at the same time did not have the competitive advantages of the companies like DuPont
DuPont
E. I. du Pont de Nemours and Company , commonly referred to as DuPont, is an American chemical company that was founded in July 1802 as a gunpowder mill by Eleuthère Irénée du Pont. DuPont was the world's third largest chemical company based on market capitalization and ninth based on revenue in 2009...

 and General Electric
General Electric
General Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...

. These companies such as International Paper
International Paper
International Paper Company is an American pulp and paper company, the largest such company in the world. It has approximately 59,500 employees, and it is headquartered in Memphis, Tennessee.-History:...

 and American Chicle saw their market share decrease significantly by 1929 as smaller competitors joined forces with each other and provided much more competition. The companies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large volume production. In addition, many of these mergers were capital-intensive. Due to high fixed costs, when demand fell, these newly-merged companies had an incentive to maintain output and reduce prices. However more often than not mergers were "quick mergers". These "quick mergers" involved mergers of companies with unrelated technology and different management. As a result, the efficiency gains associated with mergers were not present. The new and bigger company would actually face higher costs than competitors because of these technological and managerial differences. Thus, the mergers were not done to see large efficiency gains, they were in fact done because that was the trend at the time. Companies which had specific fine products, like fine writing paper, earned their profits on high margin rather than volume and took no part in Great Merger Movement.

Short-run factors


One of the major short run factors that sparked The Great Merger Movement was the desire to keep prices high. However, high prices attracted the entry of new firms into the industry who sought to take a piece of the total product. With many firms in a market, supply of the product remains high.

A major catalyst behind the Great Merger Movement was the Panic of 1893
Panic of 1893
The Panic of 1893 was a serious economic depression in the United States that began in 1893. Similar to the Panic of 1873, this panic was marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures...

, which led to a major decline in demand for many homogeneous goods. For producers of homogeneous goods, when demand falls, these producers have more of an incentive to maintain output and cut prices, in order to spread out the high fixed costs these producers faced (i.e. lowering cost per unit) and the desire to exploit efficiencies of maximum volume production. However, during the Panic of 1893, the fall in demand led to a steep fall in prices.

Another economic model proposed by Naomi R. Lamoreaux for explaining the steep price falls is to view the involved firms acting as monopolies in their respective markets. As quasi-monopolists, firms set quantity where marginal cost equals marginal revenue and price where this quantity intersects demand. When the Panic of 1893
Panic of 1893
The Panic of 1893 was a serious economic depression in the United States that began in 1893. Similar to the Panic of 1873, this panic was marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures...

 hit, demand fell and along with demand, the firm’s marginal revenue fell as well. Given high fixed costs, the new price was below average total cost, resulting in a loss. However, also being in a high fixed costs industry, these costs can be spread out through greater production (i.e. Higher quantity produced). To return to the quasi-monopoly model, in order for a firm to earn profit, firms would steal part of another firm’s market share by dropping their price slightly and producing to the point where higher quantity and lower price exceeded their average total cost. As other firms joined this practice, prices began falling everywhere and a price war ensued.

One strategy to keep prices high and to maintain profitability was for producers of the same good to collude with each other and form associations, also known as cartel
Cartel
A cartel is a formal agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products...

s. These cartels were thus able to raise prices right away, sometimes more than doubling prices. However, these prices set by cartels only provided a short-term solution because cartel members would cheat on each other by setting a lower price than the price set by the cartel. Also, the high price set by the cartel would encourage new firms to enter the industry and offer competitive pricing, causing prices to fall once again. As a result, these cartels did not succeed in maintaining high prices for a period of no more than a few years. The most viable solution to this problem was for firms to merge, through horizontal integration
Horizontal integration
In microeconomics and strategic management, the term horizontal integration describes a type of ownership and control. It is a strategy used by a business or corporation that seeks to sell a type of product in numerous markets...

, with other top firms in the market in order to control a large market share and thus successfully set a higher price.

Long-run factors


In the long run, due to desire to keep costs low, it was advantageous for firms to merge and reduce their transportation costs thus producing and transporting from one location rather than various sites of different companies as in the past. Low transport costs, coupled with economies of scale also increased firm size by two- to fourfold during the second half of the nineteenth century. In addition, technological changes prior to the merger movement within companies increased the efficient size of plants with capital intensive assembly lines allowing for economies of scale. Thus improved technology and transportation were forerunners to the Great Merger Movement. In part due to competitors as mentioned above, and in part due to the government, however, many of these initially successful mergers were eventually dismantled. The U.S. government passed the Sherman Act in 1890, setting rules against price fixing
Price fixing
Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand...

 and monopolies. Starting in the 1890s with such cases as Addyston Pipe and Steel Company v. United States
Addyston Pipe and Steel Company v. United States
Addyston Pipe and Steel Co. v. United States, 85 F. 271 , was an important case in which the United States Court of Appeals for the Sixth Circuit determined that U.S. antitrust laws, as set forth in the Sherman Antitrust Act, were to be governed by a rule of reason...

, the courts attacked large companies for strategizing with others or within their own companies to maximize profits. Price fixing with competitors created a greater incentive for companies to unite and merge under one name so that they were not competitors anymore and technically not price fixing.

Merger waves


The economic history has been divided into Merger Waves based on the merger activities in the business world as:
Period Name Facet
1897–1904 First Wave Horizontal mergers
1916–1929 Second Wave Vertical mergers
1965–1969 Third Wave Diversified conglomerate mergers
1981–1989 Fourth Wave Congeneric mergers; Hostile takeovers; Corporate Raiding
1992–2000 Fifth Wave Cross-border mergers
2003–2008 Sixth Wave Shareholder Activism, Private Equity, LBO

Deal objectives in more recent merger waves


During the third merger wave (1965–1989), corporate marriages involved more diverse companies. Acquirers more frequently bought into different industries. Sometimes this was done to smooth out cyclical bumps, to diversify, the hope being that it would hedge an investment portfolio.

Starting in the fourth merger wave (1992–1998) and continuing today, companies are more likely to acquire in the same business, or close to it, firms that complement and strengthen an acquirer’s capacity to serve customers.

Buyers aren’t necessarily hungry for the target companies’ hard assets. Now they’re going after entirely different prizes. The hot prizes aren’t things—they’re thoughts, methodologies, people and relationships. Soft goods, so to speak.

Many companies are being bought for their patents, licenses, market share, name brand, research staffs, methods, customer base, or culture. Soft capital, like this, is very perishable, fragile, and fluid. Integrating it usually takes more finesse and expertise than integrating machinery, real estate, inventory and other tangibles.

Cross-border M&A


In a study conducted in 2000 by Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...

, it was found that, on average, large M&A deals cause the domestic currency
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...

 of the target corporation to appreciate by 1% relative to the acquirers.

The rise of globalization
Globalization
Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...

 has exponentially increased the necessity for MAIC Trust accounts and securities clearing services for Like-Kind Exchanges for cross-border M&A. In 1997 alone, there were over 2333 cross-border transactions, worth a total of approximately $298 billion.
Due to the complicated nature of cross-border M&A, the vast majority of cross-border actions have unsuccessful anies seek to expand their global footprint and become more agile at creating high-performing businesses and cultures across national boundaries.

Even mergers of companies with headquarters in the same country are very much of this type and require MAIC custodial services (cross-border Mergers). After all, when Boeing acquires McDonnell Douglas, the two American companies must integrate operations in dozens of countries around the world. This is just as true for other supposedly "single country" mergers, such as the $29 billion dollar merger of Swiss drug makers Sandoz and Ciba-Geigy (now Novartis).

M&A failure


Despite the goal of performance improvement, results from mergers and acquisitions (M&A) are often disappointing. Numerous empirical studies show high failure rates of M&A deals. Studies are mostly focused on individual determinants. A book by Thomas Straub (2007) "Reasons for frequent failure in Mergers and Acquisitions" develops a comprehensive research framework that bridges rival perspectives and promotes a modern understanding of factors underlying M&A performance. The first important step towards this objective is the development of a common frame of reference that spans conflicting theoretical assumptions from different perspectives. On this basis, a comprehensive framework is proposed with which to understand the origins of M&A performance better and address the problem of fragmentation by integrating the most important competing perspectives in respect of studies on M&A Furthermore according to the existing literature relevant determinants of firm performance are derived from each dimension of the model. For the dimension strategic management, the six strategic variables: market similarity, market complementarities, production operation similarity, production operation complementarities, market power, and purchasing power were identified having an important impact on M&A performance. For the dimension organizational behavior, the variables acquisition experience, relative size, and cultural differences were found to be important. Finally, relevant determinants of M&A performance from the financial field were acquisition premium, bidding process, and due diligence. Three different ways in order to best measure post M&A performance are recognized: Synergy realization, absolute performance and finally relative performance.

Turnover contributes to M&A failures. The turnover in target companies is double the turnover experienced in non-merged firms for the ten years following the merger.

1990s


Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999:
Rank Year Purchaser Purchased Transaction value (in mil. USD)
1 1999 Vodafone Airtouch PLC Mannesmann
Mannesmann
Mannesmann AG was a German corporation with headquarters in Düsseldorf. The company was founded in 1890 originally to produce seamless steel tubes. It was traded on the Frankfurt Stock Exchange. The company had 130,860 employees worldwide and revenues of €23.27 billion.Over time, Mannesmann...

183,000
2 1999 Pfizer
Pfizer
Pfizer, Inc. is an American multinational pharmaceutical corporation. The company is based in New York City, New York with its research headquarters in Groton, Connecticut, United States...

Warner-Lambert 90,000
3 1998 Exxon
Exxon
Exxon is a chain of gas stations as well as a brand of motor fuel and related products by ExxonMobil. From 1972 to 1999, Exxon was the corporate name of the company previously known as Standard Oil Company of New Jersey or Jersey Standard....

Mobil
Mobil
Mobil, previously known as the Socony-Vacuum Oil Company, was a major American oil company which merged with Exxon in 1999 to form ExxonMobil. Today Mobil continues as a major brand name within the combined company, as well as still being a gas station sometimes paired with their own store or On...

77,200
4 1998 Citicorp Travelers Group 73,000
5 1999 SBC Communications Ameritech Corporation 63,000
6 1999 Vodafone Group AirTouch Communications 60,000
7 1998 Bell Atlantic GTE
GTE
GTE Corporation, formerly General Telephone & Electronics Corporation was the largest independent telephone company in the United States during the days of the Bell System....

53,360
8 1998 BP
BP
BP p.l.c. is a global oil and gas company headquartered in London, United Kingdom. It is the third-largest energy company and fourth-largest company in the world measured by revenues and one of the six oil and gas "supermajors"...

Amoco
Amoco
Amoco Corporation, originally Standard Oil Company , was a global chemical and oil company, founded in 1889 around a refinery located in Whiting, Indiana, United States....

53,000
9 1999 Qwest Communications US WEST
US West
U S WEST, Inc. was one of seven Regional Bell Operating Companies , created in 1983 under the Modification of Final Judgement , a case related to the antitrust breakup of AT&T...

48,000
10 1997 Worldcom
MCI Inc.
MCI, Inc. is an American telecommunications subsidiary of Verizon Communications that is headquartered in Ashburn, Virginia...

MCI Communications
MCI Communications
MCI Communications Corp. was an American telecommunications company that was instrumental in legal and regulatory changes that led to the breakup of the AT&T monopoly of American telephony and ushered in the competitive long-distance telephone industry. It was headquartered in Washington,...

42,000

2000s


Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2010:
Rank Year Purchaser Purchased Transaction value (in mil. USD)
1 2000 Fusion: AOL
AOL
AOL Inc. is an American global Internet services and media company. AOL is headquartered at 770 Broadway in New York. Founded in 1983 as Control Video Corporation, it has franchised its services to companies in several nations around the world or set up international versions of its services...

 Inc. (America Online)
Time Warner
Time Warner
Time Warner is one of the world's largest media companies, headquartered in the Time Warner Center in New York City. Formerly two separate companies, Warner Communications, Inc...

164,747
2 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961
3 2004 Royal Dutch Petroleum Company "Shell" Transport & Trading Co.
Royal Dutch Shell
Royal Dutch Shell plc , commonly known as Shell, is a global oil and gas company headquartered in The Hague, Netherlands and with its registered office in London, United Kingdom. It is the fifth-largest company in the world according to a composite measure by Forbes magazine and one of the six...

74,559
4 2006 AT&T
AT&T
AT&T Inc. is an American multinational telecommunications corporation headquartered in Whitacre Tower, Dallas, Texas, United States. It is the largest provider of mobile telephony and fixed telephony in the United States, and is also a provider of broadband and subscription television services...

 Inc.
BellSouth
BellSouth
BellSouth Corporation is an American telecommunications holding company based in Atlanta, Georgia. BellSouth was one of the seven original Regional Bell Operating Companies after the U.S...

 Corporation
72,671
5 2001 Comcast
Comcast
Comcast Corporation is the largest cable operator, home Internet service provider, and fourth largest home telephone service provider in the United States, providing cable television, broadband Internet, and telephone service to both residential and commercial customers in 39 states and the...

 Corporation
AT&T Broadband
AT&T Broadband
AT&T Broadband was the name of AT&T's cable operations, which were composed of the assets of TCI and MediaOne, Prime Cable, as well as two Comcast cable systems AT&T acquired later in a system swap. Formed in 1999, AT&T Broadband was the largest provider of cable television services...

72,041
6 2009 Pfizer
Pfizer
Pfizer, Inc. is an American multinational pharmaceutical corporation. The company is based in New York City, New York with its research headquarters in Groton, Connecticut, United States...

 Inc.
Wyeth
Wyeth
Wyeth, formerly one of the companies owned by American Home Products Corporation , was a pharmaceutical company. The company was based in Madison, New Jersey, USA...

68,000
7 2000 Spin-off: Nortel Networks Corporation 59,974
8 2002 Pfizer
Pfizer
Pfizer, Inc. is an American multinational pharmaceutical corporation. The company is based in New York City, New York with its research headquarters in Groton, Connecticut, United States...

 Inc.
Pharmacia
Pharmacia
Pharmacia was a pharmaceutical and biotechnological company in Sweden.-History:Pharmacia was founded in 1911 in Stockholm, Sweden by pharmacist Gustav Felix Grönfeldt at the Elgen Pharmacy. The company is named after the Greek word φαρμακεία, transliterated pharmakeia, which means 'sorcery'...

 Corporation
59,515
9 2004 JPMorgan Chase & Co. Bank One Corporation
Bank One Corporation
Some of the banks that were merged into these banks include:*Bank One**Security National Bank & Trust **Affiliated Bankshares of Colorado **American Fletcher Corp. **City National Bank and Trust Co...

58,761
10 2008 InBev
InBev
InBev is a subsidiary of Anheuser-Busch InBev. The company existed independently for several years - since the merger between Interbrew and AmBev and until the acquisition of Anheuser-Busch. InBev has operations in over 30 countries and sales in over 130 countries...

 Inc.
Anheuser-Busch
Anheuser-Busch
Anheuser-Busch Companies, Inc. , is an American brewing company. The company operates 12 breweries in the United States and 18 in other countries. It was, until December 2009, also one of America's largest theme park operators; operating ten theme parks across the United States through the...

 Companies, Inc.
52,000

M&A in popular culture


In the novel American Psycho
American Psycho
American Psycho is a psychological thriller and satirical novel by Bret Easton Ellis, published in 1991. The story is told in the first person by the protagonist, serial killer and Manhattan businessman Patrick Bateman. The book's graphic violence and sexual content generated a great deal of...

 the protagonist Patrick Bateman
Patrick Bateman
Patrick Bateman is a fictional character, the antihero and narrator of the novel American Psycho by Bret Easton Ellis, and its film adaptation. He has also briefly appeared in other Ellis novels.-Biography and profile:...

, played by Christian Bale
Christian Bale
Christian Charles Philip Bale is an English actor. Best known for his roles in American films, Bale has starred in both big budget Hollywood films and the smaller projects from independent producers and art houses....

 in the film adaptation
American Psycho (film)
American Psycho is a 2000 cult thriller film directed by Mary Harron based on Bret Easton Ellis's novel of the same name. Though predominantly a psycho thriller, the film also blends elements of horror, satire, and black comedy...

, works in mergers and acquisitions, which he once referred to as "murders and executions" to a potential victim.

In the film The Thomas Crown Affair
The Thomas Crown Affair (1999 film)
The Thomas Crown Affair is a 1999 American heist film directed by John McTiernan. The film, starring Pierce Brosnan, Rene Russo and Denis Leary, is a remake of the 1968 film of the same name....

, Thomas Crown is the CEO of a fictional mergers and acquisitions firm, called Crown Acquisitions.

In the sitcom How I Met Your Mother
How I Met Your Mother
How I Met Your Mother is an American sitcom that premiered on CBS on September 19, 2005, created by Craig Thomas and Carter Bays.As a framing device, the main character, Ted Mosby with narration by Bob Saget, in the year 2030 recounts to his son and daughter the events that led to his meeting...

, Marshall Eriksen
Marshall Eriksen
Marshall Eriksen is a fictional character in the American sitcom How I Met Your Mother, created by Carter Bays and Craig Thomas and portrayed by Jason Segel.-Character profile:Marshall is an easy-going, naive optimist from St. Cloud, Minnesota...

 and Barney Stinson
Barney Stinson
Barnabas "Barney" Stinson is a fictional character created by Carter Bays and Craig Thomas for the CBS television series How I Met Your Mother, portrayed by Neil Patrick Harris. The character has been extremely well received by critics and has been credited for much of the show's success...

 work at a large bank, Goliath National Bank (GNB), involved in M&A transactions.

See also


  • Competition regulator
    Competition regulator
    A competition regulator is a government agency, typically a statutory authority, sometimes called an economic regulator, which regulates and enforces competition laws, and may sometimes also enforce consumer protection laws...

  • Control premium
    Control premium
    Control premium is an amount that a buyer is usually willing to pay over the current market price of a publicly traded company. Contrary to a widely held view, this premium is not justified by the expected synergies, such as the expected increase in cash flow resulting from cost savings and revenue...

  • Corporate advisory
    Corporate advisory
    Corporate advisory refers to the activity of advising organisations, including corporations, institutions and government bodies, on mergers and acquisitions and other transactions that involve a change in ownership of a company or business...

  • Divestiture
  • Factoring (finance)
    Factoring (finance)
    Factoring is a financial transaction whereby a business job sells its accounts receivable to a third party at a discount...

  • Fairness opinion
    Fairness opinion
    A fairness opinion is a professional evaluation by an investment bank or other third party as to whether the terms of a merger, acquisition, buyback, spin-off, or going private are fair...

  • IPO
  • List of bank mergers in United States
  • Management control

  • Management due diligence
    Management due diligence
    Management Due Diligence is the process of scientifically evaluating the executives who make up the senior management team prior to the close of a business deal that involves integrating the functions and cultures of two or more companies...

  • Mergers and acquisitions in United Kingdom law
    Mergers and acquisitions in United Kingdom law
    Mergers and acquisitions in United Kingdom law refers to a body of law that covers companies, labour, and competition, which is engaged when firms restructure their affairs in the course of business.-Company law:...

  • Merger control
    Merger control
    Merger control refers to the procedure of reviewing mergers and acquisitions under antitrust / competition law. Over 60 nations worldwide have adopted a regime providing for merger control....

  • Merger integration
    Merger integration
    Merger integration, or post-merger integration refers to the aspect of an organizational merger that involves combining the original socio-technical systems of the merging organizations into one such newly-combined system.-Overview:...

  • Merger simulation
    Merger simulation
    Merger simulation is a commonly used technique when analyzing potential welfare costs and benefits of mergers between firms. Merger simulation models typically assume Differentiated Bertrand competition within a market ....

  • Second request
    Second request (law)
    In United States antitrust law, a second request is a discovery procedure by which the Federal Trade Commission and the Antitrust Division of the Justice Department investigate mergers and acquisitions which may have anticompetitive consequences.-Legal basis:...

  • Shakeout
    Shakeout
    Shakeout is a term used in business and economics to describe the consolidation of an industry or sector, in which businesses are eliminated or acquired through competition...

  • Venture capital
    Venture capital
    Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...

  • Swap ratio
    Swap ratio
    An exchange rate of the shares of the companies that would undergo a merger. This is calculated by the valuation of various assets and liabilities of the merging companies....



Further reading