Читать книгу Mergers, Acquisitions, and Corporate Restructurings - Gaughan Patrick А. - Страница 31

Starting in 1992, the number of M&As once again began to increase (Figure 2.6). Large deals, some similar in size to those that occurred in the fourth merger wave, began to occur once again. At this time, the track record of many of the highly leveraged deals of the fourth wave, some of which were still in Chapter 11 bankruptcy, was quite apparent. Managers vowed they would not duplicate the mistakes of the 1980s and focused more on strategic deals that did not unduly rely on leverage. Short-term, purely financial plays were also avoided. This all seemed to go according to plan – at least for a while.

Figure 2.6 U.S. M&A 1980–2014. Source: Thomson Securities Financial Data, March 6, 2015.

During the 1990s, the U.S. economy entered into its longest postwar expansion, and companies reacted to the increased aggregate demand by pursuing M&As, which are a faster way to grow than internal growth. At the same time, the stock market values of companies took off and various market indexes reached new highs (Figure 2.7).

Figure 2.7 S&P Index in US and Europe. Source: Bloomberg, www.econstats.com/eqty/eqea_mi_1.htm (Panel a); http://us.spindices.com/indices/equity/sp-europe-350 (Panel b).

While the expanding economy required that there be some adjustment in expected profitability, the high levels of the market became difficult to explain. We will revisit this issue a little later in this chapter.

Although the fifth merger wave featured many large megamergers, there were fewer hostile high-profile deals and more strategic mergers occurred. As the economy recovered from the 1990–1991 recession, companies began to seek to expand and mergers once again were seen as a quick and efficient manner in which to do that. Unlike the deals of the 1980s, however, the initial transactions of the 1990s emphasized strategy more than quick financial gains. These deals were not the debt-financed bust-up transactions of the fourth merger wave. Rather, they were financed through the increased use of equity, which resulted in less heavily leveraged combinations. Because the deals of the early 1990s did not rely on as much debt, there was not as much pressure to quickly sell off assets to pay down the debt and reduce the pressure of debt service. The deals that occurred were, at least initially, motivated by a specific strategy of the acquirer that could more readily be achieved by acquisitions and mergers than through internal expansion.

Industry Concentration during the Fifth Wave

Certain industries accounted for a disproportionate share of the total dollar volume of M&As in the United States during the fifth merger wave. In particular, banking and finance and communications and broadcasting accounted for 26.5 % of all U.S. deals over the period 1993–2004. However, the percentage accounted for in these industries rose from a low of 7.5 % in 1994 to a high of 41.9 % of deals in 1999. This was caused by a combination of factors, including the continued impact of deregulation and consolidation of the banking industry, as well as the dramatic changes that were ongoing in telecom and Internet-related businesses. The fifth wave would have been different had it not been for the “inflating” yet short-lived impact of these sectors.

Fad of the Fifth Merger Wave: Roll-Ups and Consolidations of Industries

Each wave brought with it certain uniquely different transactions, and the fifth wave was no exception. In the mid-1990s, the market became enthralled with consolidating deals – what were called roll-ups. Here fragmented industries were consolidated through larger-scale acquisitions of companies that were called consolidators. Certain investment banks specialized in roll-ups; they were able to get financing and were issuing stock in these consolidated companies. Table 2.4 lists some of the more prominent consolidated companies. Roll-ups were concentrated in particular businesses, such as funeral printing, office products, and floral products.

Table 2.4 Large Roll-Ups

The strategy behind roll-ups was to combine smaller companies into a national business and enjoy economies of scale while gaining the benefits of being able to market to national as opposed to regional clients. There may have been some theoretical benefits to these combinations, but the track record of many of these deals was abysmal. As with fads from prior M&A periods of frenzy, dealmakers, in this case firms that specialized in doing roll-ups, excelled for a period of time at convincing the market that there were realistic benefits to be derived from these deals. While some, such as Coach USA, have survived, many others were successful only in generating fees for the dealmakers. Many of the consolidated entities went bankrupt, while others lost value and were sold to other companies. Roll-ups were a fad that became popular while the market of the 1990s was caught up in a wave of irrational exuberance and was looking for investment opportunities.

Fifth Merger Wave in Europe, Asia, and Central and South America

The fifth merger wave was truly an international merger wave. As Figure 2.6 shows, the dollar value and number of deals in the United States increased dramatically starting in 1996. In Europe, the fifth wave really took hold starting in 1998. By 1999, the value of deals in Europe was almost as large as that of deals in the United States. Within Europe, Great Britain accounted for the largest number of deals, followed by Germany and France. In Asia, merger value and volume also increased markedly starting in 1998. The volume of deals was significant throughout Asia, including not only Japan but all the major nations in Asia. Many of the Asian nations only recently have begun to restructure their tightly controlled economies, and this restructuring has given rise to many sell-offs and acquisitions.

As discussed in Chapter 1, while the size of the M&A market in Central and South America is much smaller than Asia, which is in turn smaller than Europe and the United States, a significant volume of deals also took place in this region. The forces of economic growth and the pursuit of globalization affected all economies as the companies sought to service global markets. Expansion efforts that take place in one part of the globe set in motion a process that, if unrestrained by artificial regulation, has ripple effects throughout the world. This was the case in the fifth merger wave.

Performance of Fifth Merger Wave Acquirers

When the fifth merger wave began to take hold, corporate managers steadfastly stated that they would not make the same mistakes that were made in the fourth merger wave. Many maintained they would not engage in short-term, financially oriented deals, but would focus only on long-term, strategic deals. In fact, there is evidence that managers pursued deals that had modest positive effects for shareholders. In a large sample of 12,023 transactions with values greater than $1 million over the period 1980–2001, Moeller, Schlingemann, and Stulz found that the deals done at the beginning of the fifth wave enhanced shareholder value.45 However, between 1998 and 2001, acquiring firm shareholders lost a shocking $240 billion! (See Figure 2.8.) These losses dramatically contrast with the $8 billion that was lost during the entire 1980s (inflation-adjusted values). From a societal perspective, one might wonder, did the gains of target shareholders more than offset the losses of acquiring firm shareholders? The answer is they did not even come close. Bidder shareholder losses exceeded those of target shareholders by $134 billion. However, from the bidder shareholder's perspective, these “offsetting” gains are irrelevant. To consider these gains would be like saying, “Let's pay this large premium for a given target and, sure, we will lose a large amount of money, but we will be giving target shareholders a large gain, at our expense, and from society's perspective, there may be a net gain on this deal.”

Figure 2.8 Yearly Aggregate Dollar Return of Acquiring Firm Shareholders, 1980–2001. Source: Moeller, Sara B., Frederik P. Schlingemann, and René M. Stulz. “Wealth destruction on a massive scale? A study of acquiring-firm returns in the recent merger wave.” Journal of Finance, vol. 60, no. 2 (April 2005).

The number of large losers is striking. Moeller and her colleagues found that there were 87 deals over the period 1998–2001 that lost $1 billion or more for shareholders. Why were the acquirer's losses in the fifth wave as large as they were? One explanation is that managers were more restrained at the beginning and the middle of the fifth wave. They wanted to avoid the mistakes of the prior merger period. However, as the stock market bubble took hold, the lofty stock valuation went to managers' heads. This is evidenced by the dramatically higher P/E ratios that prevailed during this period (Figure 2.9). Managers likely believed they were responsible for the high values their shares had risen to. These hubris-filled executives thought that these high valuations were the product of their managerial expertise rather than the fact that their company, and most of the market, was riding an irrational wave of overvaluation. When such executives proposed deals to their board, they now carried the weight of the management's team “success” record. It is hard for a board to tell a chief executive officer (CEO) his or her merger proposals are unsound when they come from the same CEO who claims responsibility for the highest valuations in the company's history.

Figure 2.9 S&P 500 P/E Ratio: 1990–2014. Source: Standard & Poor's.

Emerging Market Acquirers

A new type of acquirer became more prominent in the fifth merger wave and in the 2000s – the emerging market bidder. Many of these acquiring companies were built through acquisitions of privatized businesses and consolidations of relatively smaller competitors in these emerging markets. Some grew to a substantial size and have targeted large Western companies. One example of this is Mittal, which has used M&As across the world, many of them privatized steel businesses, to become the largest steel company in the world (Table 2.5). Its clout was felt throughout the world in 2006, when it made a successful hostile bid for the second largest steel company – Arcelor. Mittal is but one example of this trend. Another is the Dubai-based Ports World, which in 2006 took over the venerable Peninsular & Oriental Navigation Co. (P&O) in a $6.8 billion acquisition. Still another is the Mumbai-based Tata Group, then led by Ratan N. Tata. The company he created is an international conglomerate that includes not only one of the world's largest sellers of coffee and tea but also luxury hotels, soft drinks, and a telecommunications business. In October 2006, the company acquired the British-owned Corus Group, which made the Tata Group one of the largest steel companies in the world. Later in 2008 the Tata Group acquired the Range Rover and Jaguar brands from the Ford Motor Company as that company fought to become a smaller, less diverse, and profitable enterprise.

Table 2.5 Largest Worldwide Steel Companies: 2004 and 2008 Production

Sources: Mittal Steel, Paul Glader, “Mittal, Arcelor Clash on Strategy in Takeover Battle,” Wall Street Journal, March 10, 2006, A2 and the World Steel Association.

The significance of the arrival of large bids from emerging market companies is that the M&A business has now become truly a worldwide phenomenon. While not that long ago most of the large bids came from U.S. bidders, the field has become truly globalized, with large, well-financed bidders coming from not only developed countries but also emerging markets. These emerging market companies have come to establish large worldwide market shares, making them highly credible bidders.

European Protectionism during the 2000s

Several European nations have difficulty allowing foreign bidders to acquire major national companies. In several instances European nations have stepped in to erect barriers to impede takeovers of national champions. For example, this was the case in 2006, when the French government arranged a hasty marriage between two French utilities, Suez SA and Gaz de France SA, as a way of fending off an unwanted bid from Italian utility Enel SpA. Spain also implemented a new takeover law to try to prevent German E.ON AG's takeover of Spanish utility Endesa SA. The European Commission ruled that Spain violated European merger rules by applying conditions that violated the spirit of these regulations. Many European countries want free markets to allow their own indigenous companies to expand beyond their own borders. At the same time they want the ability to prevent free market access when it comes to hostile bids by other nations. In several instances in the 2000s, nationalism has overpowered the pursuit of free markets.