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Mergers and Acquisitions of the 1990s:
A Record-Breaking Period
Patrick A. Gaughan
s we enter the twenty-first
century, weÕre riding the
wave of the most intense
period of mergers and acquisitions in U.S. history. The 1990s
were the fifth "merger wave" in
this countryÕs historyÑa period
of unusually intense merger and
acquisition (M&A) activity.
There have been five such
periods since the start of the
twentieth century, the prior
one occurring in the 1980s.
That 1980s wave featured
many record-breaking mergers.
And when it ended, many
thought there would be a long
pause before another merger
wave began. However, after a
short hiatus, an even stronger
merger wave took hold, far
eclipsing the 1980s boom.
The current merger wave is
path breaking because of the
unusually high number of deals
and unprecedented acquisitions
prices. While the fourth wave of
the 1980s was known both for
its megamergers and colorful
hostile deals, the fifth wave has
featured far larger deals, in addi-
© 2000 John Wiley & Sons, Inc.
tion to a good supply of hostile
The latest wave also has an
international flavor. While the
fourth merger wave of the
1980s was mainly confined to
the United States, large scale
mergers and acquisitions finally
made their way to Europe and
Asia by the mid-1990s. In
recent years, cross-border deals
in England, Italy, France, and
Germany have grabbed the
headlines. Even hostile
takeovers, long thought to be
an exclusively American phenomena, started to become
increasingly more common in
Europe. In addition, transatlantic dealsÑwith European
buyers of U.S. companies, and
vice versaÑstarted to become
Most non-U.S. mergers and
acquisitions are taking place in
Europe, with Asia well behind
but picking up momentum.
However, the fact that corporate
restructuring is taking place in
nations such as Japan and Korea
reflects their pressing need to
revamp their conservative and
poorly performing corporate
structures in light of their prolonged recessions.
One interesting characteristic of the fifth merger wave is
the trend towards consolidating
or roll-up mergers. In certain
industries, such as the printing
and funeral home industries,
leading firms ("consolidatorsÓ)
are acquiring competitors across
the nation, in an effort to build
dominant companies. Other
industries, such as banking and
long-distance telecommunications, spurred on by significant
regulatory changes, also experienced many consolidations. A lot
of these acquisitions are based
on the pursuit of economies of
scale and other efficiencies.
However, the jury is still out on
whether or not such deals will
create benefits that more than
offset their costs. In addition,
increased size alone can present
managerial problems. In banking, larger size has caused some
deterioration in service quality,
which will offset some of the
anticipated benefits.
One of the most common
motives for mergers is growth.
But there are two ways a firm
The Journal of Corporate Accounting & Finance
can grow. The first is through
internal growth. This can be slow
and ineffective, if a firm wants to
take advantage of a brief window
of opportunity when it has a
short-term advantage over competitors. The faster alternative is
to merge and acquire the necessary resources to achieve competitive goals. While bidding firms
will pay a premium to acquire
resources through mergers, this
total cost is not necessarily more
expensive than internal growth,
in which the firm has to incur all
of the costs that the normal trialand-error process may impose.
While there are exceptions,
in the vast majority of
cases growth through mergers and acquisitions is significantly faster than
through internal means.
Another commonly
cited motive for mergers is
the pursuit of synergistic
benefits. This is the new financial
math that shows that 2 + 2 = 5.
That is, combining two firms
will create a more valuable entity than the sum of the two independent firms.
However, while many merger
partners cite synergy as the
motive for their transaction, synergistic gains are often hard to
realize. There are two types of
synergy. One is derived from cost
economies, the other from revenue enhancement. Cost
economies are the easier of the
two to achieve, as they often
involve eliminating duplicate cost
factorsÑsuch as redundant personnel and overhead. Many of
the consolidating mergers of the
1990s are partially based upon
the pursuit of such synergistic
economies. Revenue-enhancing
synergy is more difficult to foresee and achieve. An example
would be a relationship in which
each firm believes that it can sell
its products and services to the
other firmÕs customer base.
Other motives for mergers
and acquisitions include diversification, whereby companies
seek to lower their risk and
exposure to certain volatile
industry segments by adding
other sectors to their corporate
umbrella. The track record of
diversifying mergers is generally
poor with notable exceptions. A
few firms, such as General
Electric, seem to be able to grow
and enhance shareholder wealth
while diversifying. However,
this is the exception rather than
This is why successful bidders in
takeover battles are sometimes
afflicted with what is called the
“winner’s curse.”
the norm.
Not all kinds of diversifications turn out poorly. While
research studies show that unrelated diversifications tend to
yield poor results, related diversificationsÑmergers and acquisitions into a field that is close to
the acquiring firmÕs main line of
businessÑtend to have a more
impressive track record. This
result has intuitive appeal. And
whatÕs the take-home message?
ItÕs that staying with what a
company knows best may yield
positive results but straying into
businesses that you do not know
is an uphill battle. Only a select
few companies can manage that
As IÕve said, certain types of
mergers, such as diversifications,
tend to yield poor results.
Unfortunately, many other
acquisitions and mergers also
yield mediocre results, while
some are outright failures.
Prominent examples include the
Snapple acquisition in which the
bidder, Quaker Oats, overpaid in
a deal in which synergies were
impossible to find. While hindsight is 20/20, it is hard to see
how Quaker Oats could justify
the high premium it paid in a
market that was saturated and
showed limited growth potential.
The adverse result in the
Snapple deal illustrates one of
the pitfalls of mergersÑ
overpaying. The higher the
price that a bidder pays (as
a multiple of earnings), the
higher a growth in earnings needed to justify the
price. Sometimes bidding
contests can cause acquisition prices to rise well
above what can be justified by
any reasonable expectation of
growth. This is why successful
bidders in takeover battles are
sometimes afflicted with what is
called the ÒwinnerÕs curse.Ó
More recent examples
include the failed Rite Aid
acquisition program. Rite AidÕs
1996 $1.4 billion acquisition of
the incompatible Thrifty Pay
Less chain was one of the factors cited for the firing of the
companyÕs chief executive.
When a potentially compatible
acquisition of Revco was halted
by the Federal Trade
Commission, Rite Aid pursued
the less favorable choice. But
Thrifty proved to be incompatible with the previously successful Rite Aid drug store chain.
Rite Aid did not anticipate the
integration problems it would
have following the acquisition.
This underscores another pitfall
of mergers and acquisitionsÑ
© 2000 John Wiley & Sons, Inc.
January / February 2000
postmerger integration. In spite
of abundant premerger planning, sometimes it is difficult
to predict all of the postmerger
integration problems that will
As deal volume rose to
record-breaking levels,
deals prices also reached
new heights. Several factors explain this. For one,
the growth of the economy created a situation
where aggressive bidders,
seeking fast growth, bid
up the prices of target
companies. In addition, the
persistent decline in long-term
interest rates helped lower discount rates that are used for
valuation. Lower discount rates
increased the present value of
future cash flows and resulted
in higher values of target companies. Between high demand
for companies and lower discount rates, values have
reached unprecedented levels in
the late 1990s.
How long will the current
merger wave last? It is impossible to predict that. Starting in the
late 1800s, we have had four
prior merger waves in U.S. economic history. Each one ended
The current economic expansion is
fast becoming the longest one in
modern U.S. economic history.
with an economic or stock market downturn. The current economic expansion is fast becoming the longest one in modern
U.S. economic history. While it
is impossible to accurately pre-
dict the end of an economic
expansion, we know that unpredictable events such as the onset
of Mideast tension, can convert
an expansion in a recession. If
the economy turns down, it is
going to become difficult for the
fifth merger wave to continue.
So what should potential
buyers and sellers do? The high
prices currently prevailing are a
boon to sellers. No one knows
how long such acquisition
multiples will last. Given
that the current economic
expansion is nearing
record lengths, the odds
that it will continue are
questionable. For sellers
who are thinking of selling
at some time in the foreseeable future, this may be
the time to lock in a good price.
On the other hand, it may be in
the interest of buyers to wait it
out a little longer, in the hopes
that the merger frenzy may cool
off and prices might weaken.
Patrick A. Gaughan, Ph.D., is a president of Economatrix Research Associates, Inc., which is an economic and financial consulting firm specializing in analysis of economic damages in litigation and valuation of
businesses, with offices in Newark and New York City. He is also a tenured full professor at the graduate
level in the College of Business at Fairleigh Dickinson University. Dr. Gaughan has authored two of the three
textbooks in the field of mergers and acquisitions, including the award-winning Mergers, Acquisitions, &
Corporate Restructuring (John Wiley & Sons, 2nd ed., 1999). He has also authored numerous other books
and journal articles.
© 2000 John Wiley & Sons, Inc.
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