Mergers and acquisitions. Part I
The ups and downs of the M&A landscape
DECEMBER / 2023
Mergers and acquisitions (M&A), much like light, behave like a wave, peaking and falling over time mimicking macroeconomic cycles. Unlike light, each M&A wave is distinct in its characteristics embedded with lessons learned from the past and the novelties brought in by technology, regulation, human behaviour.
According to Clark (2013) an M&A wave has four stages: 1) a tail-end of a recession with low premiums and volume, 2) increasing deal volume and premiums but risk is still perceived as high, 3) deal rush with peaking volume and growing premiums, 4) last-minute deals late in the cycle with high probability of failure. The wave phase is a crucial factor in the decision to merge/acquire greatly impacting the outcome of the deal.
M&A activity in the past
History of M&A is significant in understanding what is happening in this space today. In the past there have been several distinct M&A waves. Analysis by Kleinert and Klodt (2002) identify five distinct waves. The first occurred in 1897-1904 in the US manufacturing sector characterized by horizontal mergers. This form of mergers targeted growth and allowed the participants to gain economies of scale and greater market share. The wave was ended by the onset of World War I. A good example of Wave 1 deal is the merger of Carnegie Steel Company, Federal Steel Company and National Steel Company in 1901 to form the United States Steel Corporation which has led to a wave of consolidation in the U.S. metals industry.
The end of the war brought on the second wave of 1920-1929. Lessons were learned from the previous wave that horizontal integration breeds monopolies and anti-competitive behaviour. Government intervention broke-up many of the monopolies created during the first wave, which led to a swarm of vertical integration deals creating oligopolies in order to remain competitive in a market with few large players. One such merger was Standard Oil which had to dissolve its huge network after U.S. government filed an antitrust suit against the company. After stripping itself of its holdings Standard Oil returned to active acquisition activity in the U.S. oil sector. The Great Depression put an end to the second M&A wave.
The third M&A wave after the Great Depression and World War II occurred in 1965-1975. If the first wave was about domestic growth, the second was about cutting costs in the value chain, then the third was about new markets, new segments and diversification. Many of the conglomerates today were created during this wave. It was a natural progression after horizontal and vertical integrations earlier. General Electric was born in this period and to this day has holdings in energy, finance, health, transport and electrical. In the 1970s oil prices plummeted and the third wave had drawn to a close.
The fourth wave of 1984-1988 was a hostile period in the M&A world. There were numerous hostile takeovers and deals characterized by acquisitions of companies in related industries and products not in direct competition. As Jensen (1988) notes there is a lot of efficiency in hostile takeovers with benefits to shareholders and high premiums which might have spurred such an approach after a century of peaceful deal-making. An example of such deals would be the takeover of TWA by Icahn which is also an illustration of a deal gone wrong when the acquirer’s intentions for were less than friendly. The end of the fourth wave came with the stock market crash of 1987.
For Kleinert and Klodt the fifth wave came in 1995-2002. This was the wave of multinationals and mega-deals. Some of the biggest M&A transactions took place during this period including Exxon and Mobil, Daimler and Chrysler, Ford and Volvo.
Looking beyond Kleinert and Klodt’s 2002 analysis, the sixth wave can be defined as a uptick in activity in 2002-2008 (Clark, 2013). It is characterized by private equity funds, leveraged buy-outs, plentiful government support and low interest rates to stimulate M&A activity. Although not an example of a successful deal, typical of this period is the AOL and Time Warner merger valued at $350 billion. The wave ended with the subprime mortgage crisis of 2008.
History of M&A is significant in understanding what is happening in this space today. In the past there have been several distinct M&A waves. Analysis by Kleinert and Klodt (2002) identify five distinct waves. The first occurred in 1897-1904 in the US manufacturing sector characterized by horizontal mergers. This form of mergers targeted growth and allowed the participants to gain economies of scale and greater market share. The wave was ended by the onset of World War I. A good example of Wave 1 deal is the merger of Carnegie Steel Company, Federal Steel Company and National Steel Company in 1901 to form the United States Steel Corporation which has led to a wave of consolidation in the U.S. metals industry.
The end of the war brought on the second wave of 1920-1929. Lessons were learned from the previous wave that horizontal integration breeds monopolies and anti-competitive behaviour. Government intervention broke-up many of the monopolies created during the first wave, which led to a swarm of vertical integration deals creating oligopolies in order to remain competitive in a market with few large players. One such merger was Standard Oil which had to dissolve its huge network after U.S. government filed an antitrust suit against the company. After stripping itself of its holdings Standard Oil returned to active acquisition activity in the U.S. oil sector. The Great Depression put an end to the second M&A wave.
The third M&A wave after the Great Depression and World War II occurred in 1965-1975. If the first wave was about domestic growth, the second was about cutting costs in the value chain, then the third was about new markets, new segments and diversification. Many of the conglomerates today were created during this wave. It was a natural progression after horizontal and vertical integrations earlier. General Electric was born in this period and to this day has holdings in energy, finance, health, transport and electrical. In the 1970s oil prices plummeted and the third wave had drawn to a close.
The fourth wave of 1984-1988 was a hostile period in the M&A world. There were numerous hostile takeovers and deals characterized by acquisitions of companies in related industries and products not in direct competition. As Jensen (1988) notes there is a lot of efficiency in hostile takeovers with benefits to shareholders and high premiums which might have spurred such an approach after a century of peaceful deal-making. An example of such deals would be the takeover of TWA by Icahn which is also an illustration of a deal gone wrong when the acquirer’s intentions for were less than friendly. The end of the fourth wave came with the stock market crash of 1987.
For Kleinert and Klodt the fifth wave came in 1995-2002. This was the wave of multinationals and mega-deals. Some of the biggest M&A transactions took place during this period including Exxon and Mobil, Daimler and Chrysler, Ford and Volvo.
Looking beyond Kleinert and Klodt’s 2002 analysis, the sixth wave can be defined as a uptick in activity in 2002-2008 (Clark, 2013). It is characterized by private equity funds, leveraged buy-outs, plentiful government support and low interest rates to stimulate M&A activity. Although not an example of a successful deal, typical of this period is the AOL and Time Warner merger valued at $350 billion. The wave ended with the subprime mortgage crisis of 2008.
Global M&A today
There is a general agreement amongst scholars and analytics that the current, seventh, wave started around 2011 as the world recovered after the subprime mortgage crisis. However, BCG (bcg.com) analysis illustrates the overall global deal volume has been declining since 2018 meanwhile deal value has been growing.
There is a general agreement amongst scholars and analytics that the current, seventh, wave started around 2011 as the world recovered after the subprime mortgage crisis. However, BCG (bcg.com) analysis illustrates the overall global deal volume has been declining since 2018 meanwhile deal value has been growing.
With the above research claiming that the macroeconomic climate is not looking positive for the near future with an evident end to easy borrowing, there are many other indicators hinting that we are at the tail-end of the current M&A wave. So how does Wave 7 compare to its predecessors? This discussion can be focused on the several aspects: M&A triggers, wave characteristics, value and volume.
M&A triggers
When comparing M&A waves across time, it is the triggers of a wave that are most similar. The drivers triggering a wave are always economic recovery after a crisis, cyclicality, low interest rates, excess cash holdings, legislative changes and growing capital markets (CAIA Association, 2015). For example, in late 19thcentury regulatory (and economic and political upheavals) lead to the first wave, in 1920’s U.S. government move to break-up monopolies created Wave 2. Wave 7 is also one that began with changes to the legislative system post-2008 financial crisis where regulation such as Basel III was put in place to prevent a similar meltdown. Cyclicality can be found across all waves in that each wave starts after a financially damaging event like the subprime mortgage crisis in 2008 or the Great Depression in the 1930s.
When comparing M&A waves across time, it is the triggers of a wave that are most similar. The drivers triggering a wave are always economic recovery after a crisis, cyclicality, low interest rates, excess cash holdings, legislative changes and growing capital markets (CAIA Association, 2015). For example, in late 19thcentury regulatory (and economic and political upheavals) lead to the first wave, in 1920’s U.S. government move to break-up monopolies created Wave 2. Wave 7 is also one that began with changes to the legislative system post-2008 financial crisis where regulation such as Basel III was put in place to prevent a similar meltdown. Cyclicality can be found across all waves in that each wave starts after a financially damaging event like the subprime mortgage crisis in 2008 or the Great Depression in the 1930s.
Characteristics and driving forces
If wave triggers are fairly uniform across time, each wave is very different in its characteristics, intensity and duration. One prominent driving force of the Wave 7 is innovation. Previously M&A activity was driven by control in order to expand and gain economies of scale. According to BCG (bcg.com) the current wave is about access to specific capabilities such as talent or technology.
First, companies need technology to make their processes more efficient and digitalize the supply chain. This is a paradigm shift from Wave 5, when companies acquired IT targets to enter the digital product/services market. In Wave 7, companies are looking to integrate the technology into their own products and services while remaining in their respective market segments but gaining competitive advantage in cost and product differentiation (EY, 2018).
Second, as technology is being integrated into every product, companies look for tech-savvy talent and technological capabilities to create multi-functional and multi-industry technology-focused partnerships such as Post Technology Alliance by Netflix and a consortium of partners, and Uber Advanced Technologies by Toyota and Uber. Importantly, the key aspect in these deals is partnership rather than the traditional relationship between the acquirer and target which is a crucial difference between the past and the present M&A drivers.
Changing consumer preferences is another driver that is typical of the Wave 7 and is completely absent from the past. Consumers want personalized medicine, video content, food and experience which were not the case a decade ago. In response to these new desires, the M&A activity is focused on forming partnerships between traditional industries such as cosmetics, media, finance and the technology sector applying artificial intelligence and machine learning to create a personalized experience for their consumers which is tailored to their lifestyle. Examples in this field already exist such as L’Oréal and Modiface creating augmented reality for virtual makeovers (EY, 2018).
Geography is another differentiation point between previous waves and the current wave. The first waves were very much focused around U.S. and later Europe. In the 2010s emerging markets and China especially, play a significant part in the M&A world.
If wave triggers are fairly uniform across time, each wave is very different in its characteristics, intensity and duration. One prominent driving force of the Wave 7 is innovation. Previously M&A activity was driven by control in order to expand and gain economies of scale. According to BCG (bcg.com) the current wave is about access to specific capabilities such as talent or technology.
First, companies need technology to make their processes more efficient and digitalize the supply chain. This is a paradigm shift from Wave 5, when companies acquired IT targets to enter the digital product/services market. In Wave 7, companies are looking to integrate the technology into their own products and services while remaining in their respective market segments but gaining competitive advantage in cost and product differentiation (EY, 2018).
Second, as technology is being integrated into every product, companies look for tech-savvy talent and technological capabilities to create multi-functional and multi-industry technology-focused partnerships such as Post Technology Alliance by Netflix and a consortium of partners, and Uber Advanced Technologies by Toyota and Uber. Importantly, the key aspect in these deals is partnership rather than the traditional relationship between the acquirer and target which is a crucial difference between the past and the present M&A drivers.
Changing consumer preferences is another driver that is typical of the Wave 7 and is completely absent from the past. Consumers want personalized medicine, video content, food and experience which were not the case a decade ago. In response to these new desires, the M&A activity is focused on forming partnerships between traditional industries such as cosmetics, media, finance and the technology sector applying artificial intelligence and machine learning to create a personalized experience for their consumers which is tailored to their lifestyle. Examples in this field already exist such as L’Oréal and Modiface creating augmented reality for virtual makeovers (EY, 2018).
Geography is another differentiation point between previous waves and the current wave. The first waves were very much focused around U.S. and later Europe. In the 2010s emerging markets and China especially, play a significant part in the M&A world.
Value and volume
The current wave is characterized by greater involvement of private capital bidding for public companies in the last few years than has not been seen previously for example, the Kirkby acquisition of Merlin Entertainments for £6 billion, Advent bid for Cobham for £4 billion, KKR’s acquisition of interest in Axel Springer. Past experience has shown that the M&A activity was largely driven by the corporate sector but as Deloitte (2019) reports the share of corporate deals is falling and is expected to continue to do so in the near future. EY (2018) reports that middle-market deals are on the increase as smaller businesses look for ways to survive. However, many observers have noticed an uptick in megadeals, for example, Saudi Aramco and SABIC in oil and gas sector worth $69 billion and Occidental Petroleum Corporation and Anadarko Petroleum Corporation in the U.S. worth $57 billion. These might not be the sort of size seen in 2000s but nevertheless they are characteristic of the spending capacity of Wave 7.
The current wave is characterized by greater involvement of private capital bidding for public companies in the last few years than has not been seen previously for example, the Kirkby acquisition of Merlin Entertainments for £6 billion, Advent bid for Cobham for £4 billion, KKR’s acquisition of interest in Axel Springer. Past experience has shown that the M&A activity was largely driven by the corporate sector but as Deloitte (2019) reports the share of corporate deals is falling and is expected to continue to do so in the near future. EY (2018) reports that middle-market deals are on the increase as smaller businesses look for ways to survive. However, many observers have noticed an uptick in megadeals, for example, Saudi Aramco and SABIC in oil and gas sector worth $69 billion and Occidental Petroleum Corporation and Anadarko Petroleum Corporation in the U.S. worth $57 billion. These might not be the sort of size seen in 2000s but nevertheless they are characteristic of the spending capacity of Wave 7.
To conclude
In summary, looking across the M&A waves of the past century we can see that each wave has come from the same beginnings but had a very different destiny. The M&A activity at the start of the century revolved around structuring the industry while in the 2010s the industry lines are so blurred it is unclear where one ends and the other begins and the current M&A activity is exaggerating that trait further. There is a clear expansion to cross-border transactions as globalization impacts the nature of M&A and the product and process integration of technology as the driver of M&A activities globally. Nevertheless, it is clear to see that M&A moves with the trends of the general economy picking up on new developments, divesting in obsolete assets, recovering after a crisis and declining after a peak.
In summary, looking across the M&A waves of the past century we can see that each wave has come from the same beginnings but had a very different destiny. The M&A activity at the start of the century revolved around structuring the industry while in the 2010s the industry lines are so blurred it is unclear where one ends and the other begins and the current M&A activity is exaggerating that trait further. There is a clear expansion to cross-border transactions as globalization impacts the nature of M&A and the product and process integration of technology as the driver of M&A activities globally. Nevertheless, it is clear to see that M&A moves with the trends of the general economy picking up on new developments, divesting in obsolete assets, recovering after a crisis and declining after a peak.
References
- CAIA Association (2015) M&A Activity: Where Are We in the Cycle? [Online]. 38-44. Available from: https://www.caia.org/sites/default/files/AIAR_Q3_2015-07_M&A_CretinDieudonneBoucha.pdf
- Clark, P. and R.W. Mills (2013) Masterminding the deal: breakthroughs in M&A strategy and analysis. London, Kogan Page, 2013
- Deloitte (2018) The state of the deal. M&A trends 2019. [Online]. 1-32. Available from: https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/ma-trends-report.html
- EY (2018) 2019 M&A sector outlook. [Online]. 1-20. Available from: https://www.ey.com/en_ae/mergers-acquisitions
- Jensen, M. (1988) “Takeovers: Their Causes and Consequences.” The Journal of Economic Perspectives. [Online]. 2(1), 21-48. Available from: https://www.jstor.org/stable/1942738
- Kleinert, J., Klodt, H. (2002) “Causes and Consequences of Merger Waves.” Kiel Working Paper No. 1092. [Online]. 1-30. Available from: https://www.files.ethz.ch/isn/124239/kap1092.pdf
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