the strategy of takeovers. Moreover, the development of this “industry” helped facilitate the rising number of hostile takeovers that occurred in those years.
In the 2000s we do not have corporate raiders such as those attacked companies in the fourth merger wave. However, the modern version of these raiders are today's activist hedge funds which we discuss in Chapter 7.
The fourth merger wave featured several other interesting and unique characteristics. These features sharply differentiated this time from any other period in U.S. merger history.
Aggressive Role of Investment Bankers
The aggressiveness of investment bankers in pursuing M&As was crucial to the growth of the fourth wave. In turn, mergers were a great source of virtually risk-free advisory fees for investment bankers. The magnitude of these fees reached unprecedented proportions during this period. Merger specialists at both investment banks and law firms developed many innovative products and techniques designed to facilitate or prevent takeovers. They pressured both potential targets and acquirers into hiring them either to bring about or to prevent takeovers. Partially to help finance takeovers, the investment bank of Drexel Burnham Lambert pioneered the development and growth of the junk bond market. These previously lowly regarded securities became an important investment vehicle for financing many takeovers. Junk bond financing enabled expansionist firms and raiders to raise the requisite capital to contemplate acquisitions or raids on some of the more prominent corporations.
Increased Sophistication of Takeover Strategies
The fourth merger wave featured innovative acquisition techniques and investment vehicles. Offensive and defensive strategies became highly intricate. Potential targets set in place various preventative antitakeover measures to augment the active defenses they could deploy in the event that they received an unwanted bid. Bidders also had to respond with increasingly more creative takeover strategies to circumvent such defenses. These antitakeover strategies are discussed in detail in Chapter 5.
More Aggressive Use of Debt
Many of the megadeals of the 1980s were financed with large amounts of debt. This was one of the reasons small companies were able to make bids for comparatively larger targets. During this period the term leveraged buyout (LBO) became part of the vernacular of Wall Street. Through LBOs, debt may be used to take public companies private. It often was the company's own management that used this technique in management buyouts. Although public corporations had been brought private before the fourth wave, this type of transaction became much more prominent during the 1980s.
Legal and Political Strategies
During this period new conflicts arose between the federal and state governments. Besieged corporations increasingly looked to their state governments for protection against unwanted acquisition offers. They often were able to persuade local legislatures to pass antitakeover legislation, which brought the federal and state governments into direct conflict. Some representatives of the federal government, such as the Securities and Exchange Commission, believed that these laws were an infringement of interstate commerce. For their part, some state governments believed that such laws were based on their constitutionally granted state rights. Clearly, however, some state governments became protectors of indigenous corporations.
International Takeovers
Although most of the takeovers in the United States in the 1980s involved U.S. firms taking over other domestic companies, foreign bidders affected a significant percentage of takeovers, although nothing compared to what would take place in the fifth merger wave. An example of one of the international megadeals of the fourth wave was the 1987 acquisition of Standard Oil by British Petroleum for $7.8 billion. Many of the deals were motivated by non-U.S. companies seeking to expand into the larger and more stable U.S. market. In addition to the normal considerations that are involved in domestic acquisitions, foreign takeovers also introduce currency valuation issues. If the dollar falls against other currencies, as it did in the 1990s relative to many currencies, stock in U.S. corporations declines in value and the purchasing value of foreign currencies rises. A falling dollar may make U.S. acquisitions attractive investments for Japanese or European companies. The increased globalization of markets in the 1980s and 1990s brought foreign bidders to U.S. shores in increased numbers. Although U.S. companies may also engage in acquisitions in foreign markets, as many have, a falling dollar makes such acquisitions more expensive.
Role of Deregulation
Certain industries were deregulated during the 1980s. Mitchell and Mulherin analyzed a sample of 1,064 M&As and other restructurings over the period 1982–1989.44 They found that in industries that had undergone significant federal deregulation, such as air transport, broadcasting, entertainment, natural gas, and trucking, this deregulation was found to be a significant causal factor. They also noticed that all industries did not respond to deregulation in the same way. For example, the response in broadcasting was quicker than in air transport.
Why the Fourth Merger Wave Ended
The fourth merger wave ended in 1989 as the long economic expansion of the 1980s came to an end and the economy went into a brief and relatively mild recession in 1990. The economic slowdown led to the unraveling of a number of the high-profile leveraged deals of the fourth wave. In addition to the overall slowdown in the economy, other factors that led to the end of the wave included the collapse of the junk bond market, which had provided the financing for many of the LBOs of the period.
Fifth Wave
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
