Читать книгу Applied Mergers and Acquisitions - Robert F. Bruner - Страница 82

Rationality does not necessarily dictate stability of industrial markets. The catalog of industry shocks is long. But why is it rational for them to occur? The economist Joseph Schumpeter articulated some answers with his writing on the destructive quality of business cycles. Since waves of M&A activity are roughly associated with the ebb and flow of the economic cycle, Schumpeter’s work has direct relevance to M&A activity. It is the fate of most economists to be remembered more for their path of reasoning than for their conclusions.⁹ Schumpeter’s important contribution to economics was to focus attention on the key figure in economic growth: the entrepreneur. All the important economic theorists who preceded Schumpeter either ignored (e.g., Adam Smith) or scorned (e.g., Karl Marx) what the entrepreneur actually does. Schumpeter argued that the entrepreneur seeks to create turmoil, and to profit from it. This bumptious actor¹⁰ realizes that in any stable economic setting, profits will flow to established firms doing business in established ways. He wrote:

The function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old or in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on…. This kind of activity is primarily responsible for the recurrent “prosperities” that are due to the disequilibrating impact of the new products or methods. To undertake such new things is difficult and constitutes a distinct economic function, first, because they lie outside of the routine tasks which everybody understands and, secondly, because the environment resists in many ways that vary, according to social conditions, from simple refusal either to finance or to buy a new thing, to physical attack on the man who tries to produce it. To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and that define the entrepreneurial type as well as the entrepreneurial function. This function does not essentially consist in either inventing anything or otherwise creating the conditions that the enterprise exploits. It consists in getting things done.11

Only by entering the competitive field with some new process or product can the entrepreneur hope to claim a cut of the profits of the industry. This describes an economy of ceaseless and self-generated change. Business cycles arise because entrepreneurs swarm or cluster around opportunities. Schumpeter wrote:

Why do entrepreneurs appear, not continuously, that is, singly in every appropriately chosen interval, but in clusters? Exclusively because the appearance of one or a few entrepreneurs facilitates the appearance of others, and those the appearance of more in ever-increasing numbers…. Hence the first leaders are effective beyond their immediate sphere of action and so the group of entrepreneurs increases still further and the economic system is drawn more rapidly and more completely than would otherwise be the case into the process of technological and commercial reorganization which constitutes the meaning of periods of boom.¹² (Schumpeter’s emphasis)

The swarming suggested by Schumpeter describes well the geographic attraction of technology entrepreneurs to places like Silicon Valley, northern Virginia, and the Boston beltway. But it also has relevance for observed clustering of M&A activity by industries. Like iron filings to a magnet, opportunity draws the M&A entrepreneur.

Why is it, then, that investment opportunities and M&A deals tend to cluster by industry? Schumpeter lays the foundation for answering this crucial question.

The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process…. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization, that capitalist enterprise creates…. The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism…. Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction.¹³

Schumpeter’s foundation for our understanding of M&A activity might be distilled into the following points:

 Entrepreneurs who seek to create something new and profit by it drive waves of activity. If this is relevant to M&A, then we should observe at the center of individual transactions leaders who, as Schumpeter says, “get things done” against various forms of resistance in the environment. Schumpeter tells us that to understand waves of M&A activity, we should find the leader/entrepreneurs at the center of this activity.

 Profit-creating opportunities arise from new products and processes, new logistics, new markets (domestic and foreign), new forms of organization, and so on. If this is relevant to M&A, then we should observe at the center of individual transactions, and clusters of transactions within an industry, some kind of economic turbulence. Schumpeter implies that in order to understand waves of M&A activity, we should listen for the turbulence at the level of firms and markets, not at the level of the economy. The turbulence that is relevant is almost always industry-specific. This explains why deals cluster within industries, and why the attempt to explain M&A waves in the aggregate is fruitless: Each industry or market has its own rich story.

 M&A is a process of creative destruction. The destructive aspects of M&A are well documented in the press: plant closings, uprooting of managers and their families, layoffs, transaction-related lawsuits, and so on. Schumpeter hastens to remind us that it is through these processes that the economy renews itself and makes itself more agile and resilient to macroeconomic shocks. To prevent the destruction is to prevent the renewal.

A case in point is presented in Naomi Lamoreaux’ study of the M&A wave of 1894–1904. During that period, more than 1,800 firms disappeared into the formation of 93 consolidated firms with an important, if not dominant, share of market in their respective industries. Though most of these new firms quickly lost their position (because of Schumpeter’s turbulence), a few still ranked among the important firms in the year 2000: U.S. Steel, General Electric, AT&T, DuPont, Eastman Kodak, and International Harvester. This merger wave created considerable alarm among editors, scholars, and public officials who weighed the possible benefits of increased efficiency against the evils of monopoly and predatory behavior.

Lamoreaux offers a different story. She found that the bulk of the M&A activity occurred within selected industries—those characterized by capital intensive and mass-production manufacturing processes in which new firms had recently entered with new and more devastating technology. With high fixed costs, these industries faced high operating leverage, and the resulting impulse to cut prices in an effort to maintain market share and, more importantly, volume. This triggered severe price competition during the depression of the mid-1890s.

M&A entrepreneurs entered this turbulent environment to remove older and less efficient excess capacity from the industry through a new form of organization, the trust. J. P. Morgan is a preeminent example of this entrepreneur. He personally led the reorganization of numerous industries, including steel and railroads. Though the newly structured firms successfully removed excess capacity, in the longer run, they proved to be no more efficient than their nontrust rivals, and therefore proved unable to maintain their dominance unless they erected entry barriers. Lamoreaux notes that federal antitrust policy should have been focused on minimizing the erection of barriers, in lieu of offering the “hodge-podge of policies that, as the example of the steel industry indicates, sometimes hindered the combines’ efforts, sometimes helped them.”¹⁴ She concludes:

The consolidation movement was the product of a particular conjunction of historical events: the development of capital-intensive, mass-production manufacturing techniques in the late nineteenth century; the extraordinary rapid growth that many capital-intensive industries experienced after 1887; the deep depression that began in 1893…. This conjunction of events gave rise to serious price warfare during the depression of the nineties—price warfare that conventional types of collusion proved incapable of ending. After failing in repeated attempts to halt the decline in prices by means of gentlemen’s agreements, selling agencies, and pools, manufacturers in these and many other industries finally organized consolidations.15

Jensen (1993) applies a similar explanation for the wave of industrial restructuring of the 1980s and early 1990s. He argued that this wave had its roots in the turbulence of the 1970s, with the tenfold increase in energy prices, the emergence of the modern market for corporate control, and an explosion of innovation in the capital markets (specifically the emergence of a high-yield debt market). Most important, however, was the economic recovery that began in 1981 and triggered dramatic technological change, which included innovations that would improve the output of existing assets (e.g., from the rise of the personal computer), and changes that would create obsolescence of older products and processes (e.g., from the rise of Wal-Mart and wholesale clubs that introduced a new retailing model). He also cited the importance of deregulation, globalization of trade, organizational innovation (e.g., through the rise of “virtual firms”) and dramatic political changes (e.g., the decline of the Soviet sphere) as forces of change. The aggregate impact of these changes was a rise in excess capacity in industries. Unfortunately, many firms were slow to adjust: General Motors remained the high-cost producer in the industry and removed its CEO in 1992; IBM was the high-cost producer in mainframe computers until it removed its CEO in 1991. Eastman Kodak changed slowly. General Electric successfully mounted a multiyear internal transformation effort that eliminated a quarter of its total workforce. Jensen called for innovation in organizational design, and applauded the rise of the LBO association as one example through which firms could transform themselves.

Bruce Wasserstein, a prominent M&A adviser, offers another Schumpeterian explanation for M&A activity:

The merger business reflects the hubbub of our society with all its bustling and pretense. It is at the edge of change and fashion, and yet a minefield for the unwary. Mistakes are common. Still, good, bad, or indifferent, mergers and acquisitions are an essential vehicle for corporate change, and the pace of change is increasing. The patterns of industrial development through mergers, like those of economic activity, are crude and imperfect. However, there do seem to be elemental forces, Five Pistons, which drive the merger process. They are regulatory and political reform, technological change, fluctuations in financial markets, the role of leadership, and the tension between scale and focus.16

Wasserstein surveys several industries (energy, conglomerates, financial services, telecommunications, entertainment, and health care) to show that the boom in M&A activity in each of these industries during the 1990s could be traced to the turbulence induced by one or more of the five pistons. Each industry has its own story; one size does not fit all. He concludes:

The specifics driving each deal are different, but there is a common pattern to the process. Existing business strategies and structures ossify over time. These structures may survive for some period with the protection of systemic inertia. Eventually, however, external catalysts give a sharp jolt to the system. Outmoded practices become apparent. Mergers and acquisitions, a kind of rough-hewn evolutionary mechanism, then occur as companies react to the new business realities.17

Schumpeter, Lamoreaux, Jensen, and Wasserstein portray M&A activity as an instrument in the process of industrial renewal, of creative destruction. They present a rich framework for understanding M&A activity that leads to one very practical imperative: Pay attention to economic turbulence, what form it takes, how and which firms it affects, and who exploits it. Mastering an understanding of economic turbulence creates the foundation for many skills in this book: acquisition search, forecasting, valuation, deal design, and postmerger integration.