The field of mergers and acquisitions (M&As) has greatly expanded over the past quarter of a century. While M&As used to be somewhat more of a U.S. business phenomena, this changed significantly in the 1990s, and now M&As are more commonly used by corporations throughout the world to expand and pursue other corporate goals. This was very much the case in the latest merger wave of the 1990s and early 2000s, where the numbers of deals in Europe were comparable to those in the United States. In addition, other markets, such as the Asian economies, also saw much M&A activity as well as other forms of corporate restructuring. Restructuring, sell-offs, and acquisitions become more common in Asia, where countries such as Japan and South Korea began the slow process of deregulating their economies in an effort to deal with economic declines experienced during that period.
In this book we will analyze how mergers and acquisitions can be used to further a corporation’s goals. However, we will focus mainly on how M&As can be misused and why this occurs so often. We will see that flawed mergers and failed acquisitions are quite common and are not restricted to one time period. We will see that while we have had three merger booms in the United States over the past four decades, every decade featured many prominent merger failures. One characteristic of these failures is their similarity. It might seem reasonable that if several corporations had made certain prominent merger errors, then the rest of the corporate world would learn from such mistakes and not repeat them. This seems not to be the case. It is ironic, but we seem to be making some of the same merger mistakes— decade after decade. In this book we will discuss these errors and try to trace their source.
Before we begin such discussions, it is useful to establish a background in the field. For this reason we will have an initial discussion of the field of M&As that starts off with basic terminology and then goes on to provide an overview. We will start this review by highlighting some of the main laws that govern M&As in the United States. It is beyond the bounds of this book to provide a full review of the major laws in Europe and Asia. Fortunately, many of these are covered elsewhere.
Following our review of the regulatory framework of M&As, we will discuss some of the basic economics of M&As as well as provide an overview of the basic reasons why companies merge or acquire other companies. We will generally introduce these reasons in this chapter, but we will devote Chapter 2 to this issue. In this initial chapter on M&As, we will also review leveraged transactions and buyouts. The role of debt financing, and the junk bond market in particular, and the private equity business will be covered along with the trends in leveraged deals. We will see that these were more popular in some time periods than in others. In the most recent merger wave, for example, we saw fewer of the larger leveraged buyouts than what we saw in the 1980s when M&As were booming to unprecedented levels.
Finally, we will review the trends in number of dollar value of M&As. We will do this from a historical perspective that focuses on the different merger waves we have had in the United States, but also elsewhere—where relevant. As part of this review, we will point out the differences between the merger waves. Each is distinct and reflects the changing economy in the United States.
BACKGROUND AND TERMINOLOGY
A merger is a combination of two corporations in which only one corporation survives. The merged corporation typically ceases to exist. The acquirer gets the assets of the target but it must also assume its liabilities. Sometimes we have a combination of two companies that are of similar sizes and where both of the companies cease to exist following the deal and an entirely new company is created. This occurred in 1986 when UNISYS was formed through the combination of Burroughs and Sperry. However, in most cases, we have one surviving corporate entity and the other, a company we often refer to as the target, ceases to officially exist. This raises an important issue on the compilation of M&A statistics. Companies that compile data on merger statistics, such as those that are published in Mergerstat Review, usually treat the smaller company in a merger as the target and the larger one as the buyer even when they may report the deal as a merger between two companies.
Readers of literature of M&A will quickly notice that some terms are used differently in different contexts. This is actually not unique to M&As but generally applies to the use of the English language. Mergers and acquisitions are no different, although perhaps it is true to a greater extent in this field. One example is the term takeover. When one company acquires another, we could refer to this as a takeover. However, more often than not, when the term takeover is used, it refers to a hostile situation. This is where one company is attempting to acquire another against the will of the target company’s management and board. This often is done through the use of a tender offer. We will discuss hostile takeovers and tender offers a little later in this chapter. Before doing that, let’s continue with our general discussion of the terminology in the field of M&As.
MERGER PROCESS
Most M&As are friendly deals in which two companies negotiate the terms of the deal. Depending on the size of the deal, this usually involves communications between senior management of the two companies, in which they try to work out the pricing and other terms of the deal. For public companies, once the terms of the deal have been agreed upon, they are presented to shareholders of the target company for their approval. Larger deals may sometimes require the approval of the shareholders of both companies. Once shareholders approve the deal, the process moves forward to a closing. Public companies have to do public filings for major corporate events, and the sale of the company is obviously one such event that warrants such a filing by the target.
In hostile deals, the takeover process is different. A different set of communications takes place between the target and bidder. Instead of direct contact, we have an odd communications process that involves attorneys and the courts. Bidders try to make appeals directly to shareholders as they seek to have them accept their own terms, often against the recommendations of management. Target companies may go to great lengths to avoid the takeover. Sometimes this process can go on for months, such as in the 2004 Oracle and People- Soft takeover battle.
Click Here To Purchase This Book