Accounting And Finance Dissertation Introduction Sample 5

Literature developed in context of mergers’ history and evolution, scholars observed and recorded five major waves that came to characterize the historical evolution of mergers. The waves began in the 1890s. The timeline of each wave was: First wave (1897-1904), Second wave

(1916-1929), Third Wave (1965-1969), Fourth Wave (1981-1989), Fifth Wave (1992-2000), Sixth Wave (2003-2007), and Seventh Wave (2011-present) 

The first wave of mergers commenced in the late 1800s, and was a byproduct of the economic depression ongoing at the time (Harper and Leicht, 2015). The depression was observed to be a mirror-effect of the industrial revolution as it was luring businessmen by the heavy-duty industrial development and high-scale gains. It resulted in the established of several industrial corporations – many of which exist till date in the US, and are the backbone of its economy and global financial system (Harper and Leicht, 2015). The movement further triggered a movement of corporate power consolidation on the basis of cost-cutting, productivity, and lack of competition in markets. Consequently, it led to the establishment of corporate monopolies in different industrial sectors, and government rulings proved inadequate in preventing the monopolistic environment (Cefis and Marsili, 2015). Therefore, the first wave concluded as failure, as desired outcomes were not obtained. Besides, the government regulation grew stringent as the Congress implemented the first-ever anti-trust law known as the Sherman Act in 1890. The law was considered as a green flag for economic autonomy, directed at protecting free competition as the rule of trade, so that monopolistic competitiveness could be curbed (McCarthy, 2013). A follow-up Law called the Clayton Act was implemented in 1914, an extension that curtails all kinds of monopolistic merger trysts  (McCarthy, 2013).

The Second wave occurred between 1916 and 1929. During this phase, the nature of mergers was largely oligopolistic in nature, versus to the first wave (Moeller and Brady, 2015). The aftermath of WWI motivated industrial progress which inspired organizations to adopt and adapt to the second wave. In addition, governmental support to trade movements led to a surge in trade between organizations and the wave overlapped with the bullish markets in the 20s decade (Moeller and Brady, 2015). Vertical mergers gained preference over horizontal – a stark contrast to the first wave. The second wave closed with the onset of the Great Depression; triggered by the market collapse of 1929. It led to the Securities and Exchange Commission getting established in 1930. The second wave still primarily featured large industrial sectors, including chemicals, petroleum, and food (Galloway, 2017).

The third wave began in the 1960s and continued for nearly a decade, but the years between 1965 and 1969 were particularly robust with activity (Lebedev, et al, 2015). In this phase, conglomerate mergers were rather popular because businesses were particularly taken by the idea of diversification, thus they acquired companies which belonged in other business categories. Due to this, the third wave was historically labeled as the age of conglomerate mergers. Also, it is not surprising that the third wave was dominated by conglomerate mergers (Lebedev, et al, 2015). The first and second wave respectively witnessed horizontal mergers versus vertical ones

(which were very few.) Due to the types of mergers which materialized in the first wave, the Sherman Act was implemented in response to them; an effort to stop market monopoly (Galloway, 2017).

Due to new laws being imposed, corporations therefore acted decisively and opted for vertical mergers. This bold step resulted in a transformation; vertical mergers encompassed all levels of the production pyramid, and also assumed control of the distribution networks (Galloway, 2017).

This new trend of vertical mergers created a dire need for a new law to come into effect. Consequently, the Celler-Kefauver legislation act was announced in 1950 – a strong extension and follow-up to the Clayton Antitrust Act (Whitaker, 2016). This legislation forbids business organizations from overtaking control of production activities and distribution channels. In the wake of new legal implications, business corporations started veering in the direction of conglomerate mergers (Whitaker, 2016). This new merger-type opened up another window of expansion opportunity. It stimulated growth and profits escalated. By the time the third wave end, profitability became reduced, performance levels dropped, as companies grew in size.  Reflecting on the movements that took place in the third wave, it is clear that at first companies favored horizontal expansion then migrated to vertical integration, and then by rule of Law, companies got pushed to adopt conglomerate mergers (Whitaker, 2016). However, the trends may have changed, all of the merger-types have shown that they are restricted – in one way or another – and expansion possibilities via mergers grew further limited in this wave (Whitaker, 2016). Furthermore, enactment of a new legislative act titled Hart-Scott Act, in 1973, exerted more definitive control on merger activities in the US (Poli, 2015).

By the time the fourth wave happened, the frequency of mergers augmented significantly (Yaghoubi, et al, 2016). So much so, that the wave has been given the moniker “merger-mania wave.”  This wave is a clear departure from the previous three waves; the primary differentiating attributes of this wave are the increased size and reputation of the merger targets (Yaghoubi, et al, 2016). Besides, the mergers in the fourth wave were governed by a hostile model, caused due to companies and managements’ failure to reach a mutual agreement (Sherman, 2018). Instead, the deal closed by directly reaching out to the stakeholders of the target company with the motive to replace the management and get an approval for the merger to get materialized. Resultantly, the fourth wave’s dominant trait is the hostile takeovers/mergers (Sherman, 2018).

As merger activities in this wave took place rather profusely, it came to be known as

“megamergers” as well. The acceleration in the number of mergers was mainly due to Japanese and European investors were turned to the US corporate sector, and sought to invest in the organizations as they were relatively cheap then. The scenario emerged due because the value of the Dollar has suffered a setback in markets, the growth of Japanese bonds in the market gave the Japanese leverage to explore debt-possibilities. In these phase, mergers were mainly being signed by companies in the oil and gas sectors, while pharmaceuticals, airlines and banking forging a new trail of opportunities for those in the investments sector having adopted serious roles by transforming into risk-free advisory services. The years which followed, witnessed a downfall in the reliability ratings of the Japanese bonds market, and dangers of high interest rates made many corporations become debt-ridden. Companies filed for bankruptcy, and the end of the wave was marked by the introduction of outsourcing concept. 

The unique characteristic of the Fifth Wave was that it was not just limited to the United States (Rani, et al, 2016). This wave, due to markets getting globalized and increasing market competition, became widespread internationally. The wave was afoot in 1993 when the economy began to bounce back from the recessive period of 1990-1991 (Rani, et al, 2016). As the economy began to expand, corporations looked for ways to cater to the rising demand. The fifth wave is called as the most mature and transformative phase of mergers (Rani, et al, 2016). The metamorphosis of mergers in the wave is credited to the global markets’, creation of the European Union bloc, and consequently the disappearance of nationalistic limitations as the continent moved towards a one-market policy and adoption of a common currency – the Euro. Majority of the mergers in this phase happened in sectors of banking, automobiles, airlines, petroleum and gas, and Internet companies (Rani, et al, 2016). 

The Sixth wave occurred between 2003 and 2007. It was characterized by trends of globalization, shareholder activism, and privatization (Bodolica and Spraggon, 2015). The wave unfolded rather close to the time when the world was recovering from the dotcom collapse. At this juncture, shareholder participation intensified, and therefore the shareholder activism concept and trend became a new normal. Exercising their ownership rights, shareholders assumed more authority and control in corporations’ actions and activities (Bodolica and Spraggon, 2015). Although shareholders did not directly run the corporations, but still, they became actors in the decision-making processes.

Due to the increased role and participation of shareholders in organizational activities, private equity also came into the fold, and privatization gathered pace thus (Morresi and Pezzi, 2014).

Another byproduct was the Leveraged Buy-outs (LBOs) gained prominence and became widespread (Morresi and Pezzi, 2014). Leveraged Buy-outs (LBOs) are defined as mergers or acquisitions wherein the acquirer has to obtain loans in order to fulfill the costs of the target company, enabling them to materialize mergers and acquisitions without having to invest large capital. This form of mergers and acquisitions were not observed since the Fourth Wave (Graz and Papajorgji, 2015). However, in the sixth Wave, LBOs took place at minimized interest rates and private equity businesses were willing to play a role in the process (Morresi and Pezzi, 2014).

At this point, globalization emerged as the critical factor driving majority of the mergers and acquisitions (Malik, et al, 2014). Large firms – even the well-established ones – were adamant about their expansion plans; making their companies more globalized. The cross-border merger trend continued to grow significantly in the sixth wave, and the benefits were far greater than they were in the Fifth wave. The trend was further helped by availability of government support and private equity funds (Malik, et al, 2014). But, the wave came to an abrupt close in December 2007 when the subprime mortgage crisis sparked an economic collapse in the US. The same pushed the country into recession.

After the US real estate market collapse, the Seventh wave of mergers did not come about until 2011 (Vazirani, 2015). The BRICS bloc led the reemergence of mergers in world markets.

BRICS is a conglomerate of nations comprising Brazil, Russia, India, China, and South Africa. These are five economies that are rapidly-growing (Vazirani, 2015). The countries are readily developing or have recently been witnessing heightened industrialization. These countries are also amongst the most-populated in the world – they accounted for almost 40 percent of the world population, according to 2015 statistics (Vazirani, 2015). BRICS is pushing for increased trade corporation, and thus it is not surprising that these countries have become the crux of merger-activity (Vazirani, 2015).