nvn mergers ppt.docx

7/30/2019 nvn mergers ppt.docx

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- - - - - - - - Chapter 7 - - - - - - - -:

- - - - - - - - Chapter 7 - - - - - - - - The Timing of Merger Activity

Common Characteristics of Merger Movements:

Common Characteristics of Merger Movements Periods of high economic growth Favorable stock price levels andfinancial conditions Response to economic, technological, and regulatory changes

The 1895-1904 Merger Movement (the first movement) :

Mainly horizontal mergers Major changes in economic infrastructure and production technologies Transcontinentalrailroad completion resulting in national economic markets Use of electricity and increased use of coal and oilproducts The 1895-1904 Merger Movement (the first movement)

Slide4:

Motivating factors Economies of scale Merging for national markets Professional promoters and underwriters

Slide5:

Success due to "astute business leadership" (Livermore, 1935) Rapid technological and managerial improvementsDevelopment of new products Entry into new subdivisions of industry Promotion of quality brand names Commercialexploitation of research

Slide6:

Failure (Dewing, 1953) Failure to modernize plant and equipment Increase in overhead costs Lack of flexibility due tolarge size Inadequate supply of talent to manage large groups of plants

Slide7:

End of first merger movement In 1901, merger activity began downturn as some combinations failed to realize gainsIn 1903, economy went into recession In 1904, Supreme Court ruled against Northern Securities, establishing thatmergers can be attacked by Section One of the Sherman Act

The 1922-1929 Merger Movement (the second movement):

Combinations in public utilities, banking, food processing, chemicals, mining Motivating factors Product-extension IBM, General Foods, Allied Chemical Market-extension food retailing, movie theaters, department stores Verticalmergers metals, mining, oil The 1922-1929 Merger Movement (the second movement)

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Facilitating developments Transportation motor vehicles made both buyers and sellers more mobileCommunications national radio advertising facilitated product differentiation Merchandising mass distributionwith low profit margins Increased vertical integration due to advantages from technological economies or fromreliability of input supply End of second wave of merges with the onset of a severe economic slowdown in 1929

Conglomerate Merger Movement of the 1960s (the third movement):

Conglomerate Merger Movement of the 1960s (the third movement) Decline in relative importance of horizontal andvertical mergers Changes in the law Clayton Act of 1914, Section 7, had prohibited mergers only for stocktransactions Celler-Kefauver Act of 1950 closed asset-purchase loophole

Slide11:

In 1967-68 when the merger activity peaked Horizontal and vertical mergers declined to 17% Product extensionmergers increased to 60% Market extension mergers were negligible Pure conglomerates increased steadily to about23% of all mergers (or 35% in terms of assets acquired)

Slide12:

Acquiring firm characteristics small to medium-sized, adopting diversification strategy outside traditional areas ofinterest Acquired firm characteristics small to medium-sized, operating in fragmented industries, or on periphery ofmajor industries

Slide13:

Defensive diversification to avoid: Sales/profit instability Unfavorable growth prospects Adverse competitive shiftsTechnological obsolescence Increased uncertainties in acquirer's industry

Slide14:

Examples: Aerospace industry wide fluctuations in market demand, large abrupt shifts in product mix, excesscapacity aggravated by entry of firms from other industries Industrial machinery and auto parts sales instabilityRailway equipment, textiles, tobacco, movie distribution low growth prospects

Slide15:

Other motives Some mergers reflected personality of chief executive resulting in noncore acquisitions Someconglomerates were formed to imitate earlier conglomerates that appeared to have achieved high growth and highvaluations Differential price/earnings (P/E) game No sound conceptual basis source of sell-offs in later years Rise

of management theory - "good managers can manage anything"

Slide16:

End of conglomerate merger wave Antitrust laws Congress began to move against conglomerate firms in 1968 Suitsfiled by the Department of Justice arguing "mutual forebearance" Punitive tax laws Tax Reform Act of 1969 limiteduse of convertible debt to finance acquisitions EPS would have to be calculated on a fully diluted basis as if debthad been converted into common stock Declining stock prices


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The Deal Decade, 1981-1989 (the fourth movement):

The Deal Decade, 1981-1989 (the fourth movement) Motivating forces Surge in the economy and stock marketbeginning in mid-1982 Impact of international competition on mature industries such as steel and auto Unwindingdiversified firms New industries as a result of new technologies and managerial innovations

Slide18:

Decade of big deals Ten largest transactions Exceeded $6 billion each Summed to $126.1 billion Top 10 dealsreflected changes in the industry Five involved oil companies increased price instability resulting from OPECactions Two involved drug mergers increased pressure to reduce drug prices Two involved tobacco companies diversified into food industry

Slide19:

Financial innovations High yield bonds provided financing for aggressive acquisitions by raiders Financial buyersArranged going private transactions Bought segments of diversified firms "Bustup acquisitions" Buyers would seek

firms whose parts as separate entities were worth more than the whole After acquisitions, segments would bedivested Proceeds of sales were used to reduce the debt incurred to finance the transaction

Slide20:

Rise of wide range of defensive measures as a result of increased hostile takeovers End of fourth merger waveGovernment actions Highly publicized insider trading cases Passage of the Financial Institution Reform, Recovery,and Enforcement Act (FIRREA) in1989 Indictment of Michael Milken and bankruptcy of Drexel BurnhamDevelopment of powerful takeover defenses Economic recession associated with Gulf War

Strategic Mergers, 1992-2000:

Strategic Mergers, 1992-2000 Economic trends Economic recovery after Gulf War Continued rise in stock prices tonew highs Recovery of junk bond market as other investment banking firms moved in

Slide22:

Major driving forces Technology Impact of computer and software applications Impact of microwave systems andfiber optics on telecommunications industry Impact of the Internet creation of new industries and firms, changes inthe nature and forms of competitive relationships Globalization Technological developments in transportation andcommunications Europe and other regions moving toward common markets

Slide23:

Deregulation Major deregulations in financial services, telecommunications, energy, airlines, trucking, etc. Massivereorganization of industries Economic Environment Rising stock prices Rising P/E ratios Low interest rate levelsMethod of payment Predominant use of stock-for-stock transactions Less reliance on highly leveraged transactions

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Share repurchases Used as a signal by successful firms with superior revenue growth and favorable cost structuresCredible signal of future success, increased returns to shareholders Stock options Important component ofcompensation to attract innovative, experienced executives Extended to employees throughout the organization

Slide25:

Megamergers of the nineties Top ten transactions of all times occurred in 1998 and 1999 Top ten deals of thenineties totaled about $700 billion Size of M&As in relation to level of economic activity For period 1993-1999, M&Asrepresented about 12% of GDP In 1999, M&As represented 15% of GDP In the eighties, M&As represented less than4% of GDP

Timing of Merger Activity:

Timing of Merger Activity Empirical evidence does not support merger waves Generalizations on major mergermovements Each major merger movement reflected some underlying economic and/or technological changes

Slide27:

Some common financial factors associated with high levels of merger activity Rising stock prices Low interest ratesFavorable term structures of interest rates Narrow risk premia

International Perspectives:

International Perspectives M&A activity in other developed countries of the world has been even higher than in theU.S. Underlying factors Internationalization of markets Globalization of competition Antimerger laws and regulationssuch as in the UK and in EEC tightened in the 1980s, but M&A activity increased due to economic, technological, andregulatory changes

nvn mergers ppt.docx

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