M&A waves and their effects on the market

Merger and Acquisitions have been a major feature of markets for over a century and research shows they have come in waves due to market conditions, but what is the effect these waves have on the market?

Merger and Acquisition waves

     The basic principle behind these waves is a common one in the business world; there are many cycles, trends and waves in all areas from the stock markets to consumer buying. Therefore the concept is nothing new and understanding these waves gives a greater understanding to M&A's. Research has shown that these waves come in certain years for a varying length of time. 6 major waves have been identified by researchers Martynova and Renneboog (2008). The first recognised wave occurred between the late 1800's and early 1900's and the last occurred in 2007. There has been many suggestions put forward in an attempt to explain what has caused these waves. Industry and market changes have always been cited as creating opportunities for M&A's.
     The industrial revolution allowed for large industrial trusts to gain economies of scale by horizontally integrating (with companies in similar business) and creating monopolies within the market, the anti-competitive groups as a result of this were then restricted by government laws. This encouraged new methods in which companies vertically integrated to form groups in different sectors to again exploit economies of scale and this characteristic was found in the next couple of waves. Globalisation and companies' pursuit to go from trading in national markets to international markets was a new phenomena that opened up many opportunities for M&A's over the next few waves; companies took advantage of exploring new international markets that they did not have full access to before and found M&A options in their industries and those alike. From the actions presented above it could be suggested that the main driving force behind these waves is ultimately market changes and developments that come with.

The graph here shows the M&A waves from 1895 to 1995 with the peaks representing the hight of activity.

Effects on the market & Demise

     As each wave came to a decline, they all have left their mark on the market and industries. The first wave from 1897 to 1904 created monopolies within the market, especially found in the manufacturing industries which took advantage of the opportunities created by the industrial revolution. It significantly reduced the quantity of companies in the market as the smaller companies were taken over. Many saw this as a disadvantage within the market which could be controlled by the few large corporations and smaller companies were unable to penetrate the market or even start up. As a result, the controversial wave was regulated by the government which implicated policies to reduce the monopolies power and the stock market cash in 1904 ended the first wave.
     The post war economic boom and government policies allowed for companies to work together without creating monopolies; this was an effective new condition as many companies had power in the market and there were many advantages for the market under these conditions. However the 1929 stock market crash and Great Depression ended this wave and conditions were again bleak for the market. In a turn of events, the next two waves saw smaller companies acquiring larger companies and foreign takeovers could be seen; the first hostile takeover between INCO and ESB was formed during this wave and ultimately gave way to the 'poison pill'. This method is an attempt by a company to make its stocks less attractive; acting as a deterrent for a hostile takeover, this created what many saw as a difficult market place and new anti-takeover laws put an end to the wave along with the Gulf War.
     The M&A's from 1992-2000 were mostly friendly and also saw the greatest value in deals of all the waves; an economic boom created a market place full of M&A's with many top companies involved grossing a total value of $3.3 trillion. The burst in the stock market bubble ended this wave as so often happened in previous waves.

Conclusion

Each wave had different affects on the market they operated in and were characterised by. As times changed, so did the principles of the takeovers and the types of integration. Early on the M&A waves paved the way for anti-competitive takeovers to be regulated and created a fairer environment. The later waves saw the development of markets internationally but also raised the concern of hostile takeovers which were quickly countered both by companies and governments alike. Across all the waves, the effects on the market in general was an overall increase in the size of companies, globalisation and a mixture of laws both encouraging and discouraging takeovers (depending if they were hostile or not).