The Everchanging nature of M&A - A deep dive into history

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What is M&A?

Mergers and Acquisitions is a broad term that covers the consolidation of firms or part of firms or assets through different types of financial transactions. In general, M&A is a term that is used for a merger, acquisition, consolidation, tender offers and much more. For the scope of this blog, we'll take M&A in its broader aspect considering that it ranges outside of atypical Merger or Acquisition.

M&A is not something new. M&As are playing a key role historically in multiple economic downturns. To date, the evolution of M&A is being broken down into 6 waves, however, due to the pandemic, some believe that we have encountered the 7th wave as well. Before diving into the details of the 7th wave, let's have a sneak peek into the past.

First wave/Monopolisation (1897-1904)

Known as the 'Great Merger Movement', the first wave was centred across the US manufacturing sector. This wave was driven by corporations who were targeting to reach economies of scale by horizontal mergers. A horizontal merger is when firms acquire their competition thereby it was also known as the wave that created monopolies. One of the biggest merger of that time was done by J.P. Morgan where five agricultural equipment firms merged to form International Harvester Corporation in 1902.

Second wave/Demonopolisation (1916-1929)

The second wave was majorly driven due to government regulations where they wanted to demonopolise the market. The prime example of that is Standard Oil, as they were ruled as an illegal monopoly in 1911. This stream led companies to perform vertical mergers. A vertical merger is where a firm integrates with another firm that is vertically above or below them in the value chain. For example: A tyre manufacturing firm merge with a rubber manufacturing firm. This helps the merged firm to have more control over prices of the final product.

The Third wave/Diversification (1965-1969)

As we know that 1929 led to the Great depression and like many other services, M&A also took a pause. With very few M&A in the next 35 years, firms decided to start an M&A wave that helps them become a Conglomerate. Firms understood that they have reached the pinnacle of both horizontal and vertical mergers so they decided to expand and invest in totally unrelated businesses. One name that emerged during this wave was GE. This kind of acquisitions help the head firm to try different markets thereby having more control at the overall market.

Fourth wave/Hostile Takeovers (1984-1989)

Before we move into details, these were the years when greed took over everything. As was very well quoted by Gordon Gekko in the movie Wall Street from 1987, 'Greed, for lack of a better word, is good'.  A hostile takeover is when a firm/investor takes over another firm in a hostile manner i.e. without the agreement of owners, shareholders, or management. This was the period where Investment Bankers played a crucial role, especially with LBOs. A Leveraged Buyout (LBO) is when the acquirer uses leverage/debt as the primary vehicle to fund the acquisition. the largest LBO in history took place in 1988 where RJR Nabisco (A tobacco firm) was bought out by KKR (an investment firm).

Fifth wave/Cross-Border Merger (1993-2000)

Following on the footprints of greed, this was a duration of mega deals. In order to achieve bigger economies of scale, firms started expanding across borders thus leading to creation of multinational corporations. During this period, tons of foreign investments entered the US market, followed by a ton of investment outflow towards Asian countries that provided cheaper labour cost thereby leading to even better economies of scale. Cross-Border merger, as the name implies is a merger of 2 firms across countries. In this merger, the laws of the home country of the acquirer prevails, however, due to a fear of monopolisation, cross-border deals face more scrutiny by government then other types of M&As.

Sixth wave/Shareholder Activism (2004-2007)

These were the years when management and the board of directors lost their powers to shareholder activists. During these years, shareholders started playing an active role in the firm and displayed more power and influence in decision making activities. This is where Private Equity firms gained traction and as the world was still recovering from the dotcom crash, people were desperately looking for changes in the financial system and this merger wave facilitated the same. LBOs became prevalent and Globalisation of firms became a key factor in any firms success.

Closing Thoughts

M&A as a domain, like many others, has evolved drastically in the last century and continuous to evolve & adapt every single day. As we have seen in the pandemic, although the pandemic is still ongoing and half of the businesses are still shut, every economy is rising and the same is seen in the world of M&As with the rise of SPACs. Special Purpose Acquisition Company(SPAC) is a company that has no pyhical operations and is created with the sole purpose of acquiring another company. SPACs were created by David Nussbaum in 1993, so this is not something new but something that has picked pace during the pandemic, which some people consider as the seventh wave. 

Aligning with multiple Investment Bankers thought, I also believe that this pandemic has led to the 7th wave in M&A. I'll be covering the same in detail in my next blog i.e. The 7th wave of M&A.

Recommended Reads:
History of M&A
A Historical Analysis of M&A Waves