After the recession in
1974-1975, the US economy entered a long period of expansion during which the
merger and acquisition trend moved upward again. Hostile mergers were
significant part of the fourth wave. Takeovers were considered healthy or
hostile based on the e reaction of the target company’s board of directors. If
the board accepted the takeover it was considered friendly and if it opposed
it, it was deemed to be hostile.
The 1980s merger wave was
known as a ”takeover” wave. As the number of hostile takeovers proliferated
they were recognized gradually as an acceptable tool for growing companies.
The first hostile takeover
was made in 1974 by Morgan Stanley on behalf of Inco seeking to take over ESB.
This bid opened the door for the major investment banks to make hostile
takeover bids on behalf of raiders. Corporate raiders, such as Carl Icahn, T.
Boone Pickens, and Ronald Perelman, profited handsomely by putting companies
into play (i.e. forced them into being a target), sometimes accepting
”greenmail” to sell back equity to management, and sometimes taking over a
company to break it up and sell its assets. These corporate raiders leveraged
limited resources to make millions of dollars for themselves and never really
Junk bond financing and
leveraged buyouts became commonplace and were sources of quick financing.
Investment banker Drexel Burnham Lambert led the charge in using new and
controversial financing techniques (LBO’s) to facilitate the takeover of
companies. Increasingly, US companies sought mergers or acquisitions as a
response to global competition, such as Amoco and Exxon buying Canadian oil
companies. In addition, non-US companies increasingly bought US companies and
other cross-border companies as many of the largest companies in the world were
formed in countries outside the US. The best example of this was the 1989
United Kingdom’s Beecham Group plc’s acquisition of SmithKline Beecham
Corporation for $16 billion.
In the mid-1980s, the pace
of takeovers as w a t slow down due to introduction and usage of various
defensive techniques like the poison pill and their eventual judicial acceptance.
However, even after the stock market crash of October 1987, merger activity
continued and by 1988 there were more than 200 buyout firms with aggregate
assets of $30 billion to facilitate takeovers.
With the collapse of the
junk bond market this wave also ended. In the aftermath of this wave, the
market was jarred by the insider trading scandals and excesses that became
evident.The lawsuits were brought by US government against some of the
best-known names in the market such as Ivan Boesky and Michael Milken, the
mastermind behind Drexel Burnham Lambert’s novel financing techniques.
During the fourth wave, the
signature takeover battle was the bidding war for RJR Nabisco in 1988. This
battle involved a proposed management buyout led by CEO F. Ross Johnson opposed
by Kohlberg Kravis Roberts (KKR), a takeover specialist. During the battle, RJR
Nabisco’s board faced immense pressure and conflicting facts from its own
management team, as each detail was widely reported in the media. The result
was a $25 billion leveraged buyout (LBO) by KKR.
During this era the
corporate raiders earned handsome profits without taking control over the
management of the target company. They
attempted to takeover a target and later sell the target shares at a price
higher than that which was paid originally.
Investment bankers played an aggressive role during this time. M&A
advisory services became a lucrative source of income for investment banks. The
merger specialists at investment banks and law firms developed many a
techniques to facilitate and prevent hostile takeovers.
The increased use of debt
to finance acquisitions was the major characteristic of this era. The yield on
junk bonds was significantly higher than that of investment grade bonds. Hence the ready availability of finance
helped even small firms to acquire far bigger and well-established firms. Leveraged
buyout (LBO) emerged in a big way as method of financing during this period.
This merger wave also featured innovations in acquisition techniques and
investment vehicles. The investment bank Drexel Burnham Lambert pioneered the
junk bond instrument. This further helped a full scale growth and development
of junk bond markets in USA.
Ø E. FIFTH WAVE (1990-2000)
Mega mergers, as in the
fourth wave began to take place in the fifth wave too. The number of hostile
deals was less than strategic mergers. With the recovery of the economy in
1992, companies sought to expand and mergers were seen as a quick and efficient
way to grow fast. Unlike the deals of 1980’s, the transactions of the fifth
wave emphasized more on strategy rather than quick financial gains. Most of the
deals were financed through the increased use of equity.
The fifth wave is
considered to be an international one, as majority of the notable mergers have
been either entirely outside the United States or involved a non-US party.
Overall, the worldwide volume of transactions rose from $322 billion in 1992 to
$3.2 trillion in 2000. The clearest reflection of this trend is the $180
billion Vodafone Air Touch-Mannesmann AG combination, the largest in the
history of M. This 2000 transaction was a hostile takeover by the British
giant for the second largest German telecommunications company.
Major mergers and
acquisitions turned to be cross-border transactions as real growth for many of
the companies required global scale operations. Technological improvements in
the form of linking of many of the major stock markets helped in this
globalized M activity.
Worldwide consolidation in
many industries, such as the automobile, telecommunications, airlines, and
metal industries have been an outcome of this wave. In the highly regulated
industries, such as banking, the merger activity remained mostly domestic, but
even this domestic consolidation is often a response to international
In particular, this may be
a primary factor for the increased level of activity in Europe, from the adoption
of a single currency (i.e. the euro) and an increasingly linked market to the
widespread privatization of government-controlled entities. Many European
governments significantly shattered longstanding restrictions that had
prevented many cross-border deals. Even
in the US, some major impediments to mergers and acquisitions activity were
removed. For example, the Telecommunications Act of 1996 and the partial repeal
of the Glass-Steagall Act had directly caused consolidation in the
telecommunications and financial services industries.
In addition to the global
nature of this wave, the pace of the fifth wave has been boosted by the
communications and technology revolution brought primarily by the Internet
towards the end of the twentieth century. The incredibly high valuations of
many of these technology companies enabled them to buy other technology
companies to allow them to grow – or to fill in their product line. The biggest
technology companies, such as Microsoft and Cisco, regularly bought 10 or more
companies every year. Other companies, like AOL, bought ”old-economy”
companies, like Time-Warner, to create the conglomerate ”clicks and bricks”
While European companies were
willing to use hostile takeovers, such activity did not find much favour in the
US. During this merger wave, the considerable appetite for initial public
offerings (IPOs) diminished the need for leveraged buyouts (LBOs). Even when
the number of hostile transactions was relatively small, the fear of hostile
activity undoubtedly fostered the ”buy or be bought” sentiments. Since the
collapse of the stock prices of Internet companies at the beginning of 2000,
the merger wave slowed down considerably.
F. Sixth Wave (2003-Till Present)
The sixth and the ongoing
wave of M started from the year 2003 and is still continuing. This wave
is characterized by deals in which corporate governance and shareholder
activism, have gained primary importance. Deals have now reached such humongous
proportions that LBOs again became the dominant method for acquisitions.
The growing footprint of
private equity firms on the merger and acquisition space cannot be
overemphasized. The rise of private equity has changed the face of M on a
global scale. Flush with cash from institutional investors for super-normal
returns, buyout funds have an edge while hunting for assets. As per a Reuters
report, “Pvt Equity firms or financial sponsors accounted for 11% of Asian
M&A Activity in first half of 2007. Since then private equity firms have played
a pivotal role in the M&A scenario
Table 3Latest prominent M and A deals
1.4 Merger and
Acquisition Trends in India:
In Indian perspective, Mergers and Acquisitions came into
limelight after liberalization and it started picking up only from the
mid-1990s. That is mostly attributable
to the liberalized economic policies since 1991. Therefore, M&A phases in
India can be categorized as pre-liberalization phase and post-liberalization
phase. Undoubtedly, the post-liberalization phase was more supportive for
M&A with many of the policy decision in favor of Mergers and Acquisitions.
Various studies have been conducted on the Mergers and
Acquisition activities in India to ascertain the trend. Studies of Rao, 1998
and Venkateswaran, 1993 suggested that the pre-liberalization era, (especially
post 1970) was devoid of action for Mergers and Acquisition activities in
India. Few common reasons for such a dull scenario were
The tight regulatory environment (MRTPA, FERA and other
Higher licensing and clearance resulting in higher entry
and exit barriers
Ownership pattern –predominantly corporate ownerships with
the financial institutions
These amongst several other regulatory factors were not conducive
for M&A activity. The Monopolies and
Restrictive Trade Policy (MRTPA) was concerned with the regulations restraining
the consolidation of market power resulting largely from horizontal merger. The
FERA was relating to inbound and outbound deal restrictions. Consequently,
Mergers of conglomerate nature were not influenced by these stringent
regulations and there were stray cases of conglomerate M&A in India
During the post-independence period
and before the promulgations of stringent regulations, large number of M&As
were executed in industries like jute, cotton textiles, sugar, insurance,
banking, electricity and tea plantation.
One of the very important
amalgamations was the merger of over 200 insurance companies and provident
societies to form Life Insurance Corporation (LIC) of India in 1956. The
National Textiles Corporation (NTC) took over a large number of sick textiles
units. In the year 1950, the Goenka Group acquired two British trading houses
namely the Duncan Brothers and Octavius Steel. They also had some successful
acquisitions in the areas of tea, automobiles, tyres, jute, electric cables and
cotton textiles. The government had, in fact, encouraged M&A to help revive
the sick units.
M&As, as strategies were employed by several
corporate groups like R.P. Goenka, Vijay Mallya and Manu Chhabria for growth
and expansion of their empires in India during the 80s. Some of the companies
taken over by RPG group included Dunlop, Ceat, Philips Carbon Black and
Gramaphone Company of India. The first of the acquisitions was CEAT Tyres of
India in the year 1981. The group then went on to acquire KEC (1982); Searle
India (RPG Life Sciences 1983); Dunlop (1984); Gramophone Company of India Ltd
(now Saregama India 1986); and finally CESC, Harrisons Malayalam, Spencer &
Co. and ICIL, all in 1989. Vijay Mallya’s United Breweries (UB) group was
created out of various mergers and acquisitions.in 1988 there was an unfriendly
takeover bid byswaraj paul which however could not succeed.
The economic liberalization in the year 1991 drastically
changed the dynamism of the business within the Indian economy. Deregulations
of the market to make the economy market oriented, the changes which allowed
greater foreign direct investment, tax changes to expand the role of private
and foreign players has -helped industries within the economy to pursue
growthstrategies . M&A being one of the easiest strategies in terms of
effort was considered the mantra for growth amongst various industries.
The post liberalization phase can be further sub-divided
into three phases of growth:
Ø Slow growth period(1991-2000):
its meager size compared to global M&As, the growth trajectory in India started
picking up. The period from 1991-2000 was a period of growth through M&A
amongst different industries which clearly reveals the start of the M&A
activities in India.
Energy, Gas and power