Summary: Unit 1 Merger Waves

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• 1 unit 1 merger waves

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• What is a merger wave?

  A clustering of M&A activity concentrated in a specific time period and industry.
  

  • Common features:
    • monopolistic goals
    • market booms
    • infrastructure changes
    • entrepreneurs exiting industries
  • Gort (1969) first documented the economic disturbance theory — waves occur when economic shocks create valuation differences between firms.

• What drove the 1st Wave of mergers and how did it end?

  The 1st Wave was a monopoly wave.
  

  • Driven by:
    • industrialisation
    • transport expansion
    • capital market development
  • Ended: economic recession and stronger antitrust enforcement.

• What drove the 2nd Wave of mergers and how did it end?

  The 2nd Wave was an oligopoly wave.
  

  • Driven by:
    • post-WW1 boom
    • rise of mass production
  • Ended: 1929 stock market crash and Great Depression.

• What drove the 3rd Wave of mergers and how did it end?

  The 3rd Wave was a conglomerate wave.
  

  • Driven by:
    • post-WW2 growth
    • antitrust laws blocked horizontal and vertical mergers
  • Ended: conglomerate stocks collapsed 1969-70 when anticipated synergies never materialised; 1973 oil crisis.

• What drove the 4th Wave of mergers and how did it end?

  The 4th Wave was a hostile takeover wave.
  

  • Driven by:
    • market deregulation
    • junk bond financing enabling LBOs
    • bust-up acquisitions
  • Ended: junk bond market collapse, economic slowdown, antitrust concerns.

• What drove the 5th Wave of mergers and how did it end?

  The 5th Wave was a strategic/synergy wave — largest in history.
  

  • Driven by:
    • internet and technology emergence
    • globalisation
    • stock market boom
    • deregulation
  • Ended: dot-com bubble burst.

• What are the key characteristics of the 6th Wave of mergers?

  The 6th Wave is a cross-border and private equity wave.
  

  • Key characteristics:
    • recovery from dot-com crash
    • globalisation
    • rise of private equity
    • cheap debt financing
    • ESG factors
  • Cross-border deals ~32% ($1.1tn) of global M&A by 2022.

• What are the 3 assumptions of Q Theory?

  The assumptions are:
  

  1. Managers are rational.
  2. Markets are rational and efficient — firms are fairly priced.
  3. Managers act to maximise long-term value.

  • Mergers occur when economic shocks create valuation differences between firms.

• What is Tobin's Q ratio?

  It is the market value of a firm divided by the replacement cost of its assets.
  

  • Q > 1 = firm is efficiently managed (market values assets above replacement cost).
  • Q < 1 = inefficiently managed.
  • In M&A: high-Q firms acquire low-Q firms.

• What is the core argument of Jovanovic & Rousseau (2002)?

  Mergers are the "vehicle" through which capital flows to better projects and better management.
  

  • High-Q (well-managed) firms acquire low-Q (poorly-managed) firms.
  • Creates value by putting assets in the hands of better managers.