Term Paper: Merger Activity Due in Large

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¶ … merger activity due in large part to the internationalization of trade, the globalization of the transportation industry and innovations in telecommunications. Mergers have been used for a wide range of purposes, including achieving a synergistic effect, breaking up corporations that have become too large and unwieldy, and to help companies expend their market share in other regions. Over time, merger activity tends to assume a pattern of waves that can be attributed to several known factors such as severe economic shock or lax government regulatory polices, but a wide range of other factors have also been shown to contribute to the cyclical pattern of wave mergers, an issue that is the focus of this study. The primary aims of this study were to identify the presence of two distinct states of merger activity, high and low, if they existed as well as to identify the relevant factors that influence merger waves. In support of these aims, the study's objectives were to make comparative analyses of different waves. A review of the secondary data provides a basis for the study's conclusions and recommendations presented in the concluding chapter.

Table of Contents

Chapter 1: Introduction

Statement of the Problem

Aims and Objectives

Overview of the Study

Chapter 2: Literature Review

Background and Overview

Theories of Merger Waves

Empirical Evidence in Support of Merger Waves

Chapter 3: Research Design and Information Sources

Research Design

Information Sources

Chapter 4: Data Analysis

Chapter 5: Conclusions and Recommendations

Chapter 6: Reflections

IDENTIFYING and COMPARIGN RELEVANT FACTORS THAT INFLUENCE MERGER and ACQUISITION WAVES

Introduction

The 20th century may have been the most violent in human history, but it was also the "Century of the Merger." Time and again throughout the 20th century, companies opted to merge for various reasons, including responses to changes in the marketplace and governmental regulatory oversight. One of the common features that characterized the tens of thousands of mergers that took place during the 20th century was the distinctive patterns they assumed, with several major merger waves being discernible over time and from time to time. Depicted graphically, these merger waves assume distinctive peaks and troughs that are variously attributed to the business environment in which they occurred. In this regard, Knoke (2009) reports that, "The United States experienced several merger waves during the twentieth century, beginning with the 1895-1905 cycle that eliminated cut-throat competition in many manufacturing industries by creating vertically integrated production facilities under the near monopoly control of such giant corporations as U.S. Steel, DuPont, General Electric, International Harvester, Standard Oil, Pittsburgh Plate Glass, and the U.S. Rubber Company" (p. 57).

Then as now, the main goal of companies is to maximize the shareholders' value. Many business leaders believe that one of the most efficient ways to achieve this is through merger or acquisition. For the purposes of this study, merger is defined as the process where the shareholders of two or several companies decide to merge into a single company and acquisition is defined as the process where the shareholders of one company buy the ownership of another company or its assets. The increase in merger and acquisition (M&a) activity has generated a new phenomenon, which is merger wave. This phenomenon has been first observed in United States, then in United Kingdom and recently in other European countries.

While a year-by-year analysis of these merger waves indicates that major shock events such as the Great Depression or major world wars have an effect on merger activity, a comparison of these waves shows that merger waves are also sustained or constrained as the result of changes in governmental regulatory oversight, innovations in technologies, and other factors that influence business cycles. In reality, this is not surprising since surplus capital will help fuel business activity and governmental regulations will have an effect as well. In this regard, Komlenovic, Mamun and Mishra (2011) report that, "Industry aggregate mergers vary significantly with business cycle, increasing during boom and peak periods and decreasing during recessions and trough periods. In other words, business cycle positively affects merger activity" (p. 233). Likewise, Grossman (2010) recently observed that, "The periodic emergence of merger waves suggests that they wax and wane" (p. 112). Not surprisingly as well, these merger waves have been the focus of a growing amount of interest on the part of economists, lawmakers and business leaders who are interested in developing a better understanding of the effects of these merger wages on business activity and the implications of these peaks and troughs for the larger economy in which they take place, which is also the problem considered by this study and which is discussed further below.

Statement of the Problem

The historic patterns of merger waves are attributed to various factors including the ability of mergers to expand shortage capacity due to increased industry demand as well as for reducing excess capacity caused by a decline in industry demand (Komlenovic, Mamun & Mishra 2011). Furthermore, a number of models have been in an attempt to control for the constellation of capital market conditions that can invoke merger waves, including neo-classical theory, behavioral theory, Q-theory and other industry-specific determinants of mergers (Komlenovic et al. 2011). Likewise, a number of economic patterns have, over time, exhibited discernible patterns and waves in their behaviors that are associated with corresponding major economic events such as financial crises or unexpected shifts in governmental policies and the extent of regulatory oversight in place at the time (Hamilton 1989). In response to the need to better understand these correlations, a number of innovative approaches have been developed that can model these correlations in various ways. In this regard, Engle reports that, "Some use new flexible functional forms. Others are based on new data sets, particularly those using intra-daily data" (p. 41). These modeling approaches include those that are based on daily range statistics and realized volatilities and correlations including Gallo and Otranto (2007) use of regime-switching models of correlation. Despite this growing interest and a growing body of research that indicates the procyclicality of aggregate merger activities, there remains a dearth of timely studies in this area (Komlenovic et al. 2011), a gap that this study sought to help fill.

Aims and Objectives

The literature has advanced the idea that mergers follow a wave pattern. Therefore, the overarching aims of this study were (a) to identify the presence of two distinct states of merger activity, high and low, if they existed and (b) to identify the relevant factors that influence merger waves. In support of this aim, the study's objectives were to make comparative analyses of different waves using the format described below.

Overview of the Study

The organization of the study followed the guidance provided by Gratton and Jones (2003) who advise, "After an introductory chapter, most studies will include one or more chapters where you draw upon and consider theories, arguments and findings from the literature and which obviously relate in some way to your question or hypothesis" (p. 233). Therefore, Chapter 1 of the study was used to introduce the issues of interest, provide a statement of the problem and the study's aims and objectives. The second chapter presents a review of the relevant peer-reviewed and scholarly literature concerning the cyclicality of merger waves, and chapter three describes more fully the study's research design and methodology. Chapter four presents the analysis of the data collected for the study, and the penultimate chapter provides salient conclusions and recommendations based on the research. Finally, a reflections chapter concludes the study.

CHAPTER TWO:

LITERATURE REVIEW

Background and Overview

In many ways, the increased amount of merger activity over the past 200 years or so closely follows the industrialization of the world and the globalization of its markets. Merger activity has been facilitated by a wide range of governmental, technological and social forces that have combined to create situations in which mergers appear to be a good choice for corporate leaders seeking to grow their market share or improve their competitive position. Although the straightforward definition presented in the introductory chapter provides the general concept of a merger, there are other factors involved as well that should be taken into account in any analysis of mergers and acquisitions and their implications for business leaders. In this regard, according to Black's Law Dictionary (1991), a merger is "the fusion or absorption of one thing or right into another, generally spoken of a case where one of the subjects is of less dignity or importance than the other. Here the less important ceases to have an independent existence" (p. 988).

Although the "less dignified" or important entity may formally cease to exist in the newly merged entity, it is reasonable to suggest that influential and well-entrenched vestiges of its organizational culture and legacy systems will inevitably create challenges to the firm's post-merger performance. One of the more interesting issues concerning merger waves is the division of opinion about what effects the business environment has on merger activity. According to Medlen (2007), finance-dominated theories… [END OF PREVIEW]

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