Merger Waves
September 10, 2024
What are Merger Waves?
Periods where there is a high volume of M&A bids are known as merger waves. These are typically cyclical patterns and occur during times of economic growth and high stock market valuations. Merger waves also occur following specific industry shocks (or structural changes) whereby the sector or industry’s assets become reallocated to fit the new business landscape. These shocks can be regulatory, technological or economic and create a new environment.
Key Learning Points
- Merger waves refer to periods of unusually large M&A activities and are typically cyclical and linked to economic growth periods
- The term ‘Mergers & Acquisitions’ covers all the financial transactions that combine two or more companies and consolidated into one company
- An acquisition is where one firm acquires another company and consolidates the acquired business into its operations
- A merger is when two companies agree to consolidate into a single new company
- M&A valuations are determined by the combined cost of the two companies at the time of the transaction, this includes all equity, debt and cash components as agreed in the deal
- Metrics such as P/E ratios, EV/Sales, EV/EBITDA and DCF valuations are used to assist in valuing a target company
Merger Waves in History
Six merger waves have been identified in the US in recent years:
- 1897-1904: first merger wave driven by the desire to consolidate smaller companies and achieve monopolistic control of industries particularly manufacturers to benefit from economies of scale
- 1916-1929: merging of companies in the manufacturing sector (horizontal mergers) along with vertical mergers to improve production efficiency
- 1965-1969: creating conglomerates in the 1960s as firms in different industries merged
- 1981-1990: focused on strategic goals in similar businesses and defining synergies
- 1993-2000: increased globalization marked the beginning of international M&A such as Exxon and Mobil
- 2000- present: M&A largely driven by technological advances and ongoing overall globalisation
The chart below shows the increasing number of M&A deals in recent years and demonstrates boom periods of higher activity.
Heightened M&A Activity
M&A can occur at any time although activity tends to be higher during periods of economics growth. It can also coincide when a target company finds itself in a period of slow growth or low valuation and therefore becomes an attractive target to be acquired at more attractive multiples.
Horizontal M&A refers to two businesses in the same industry or sector combining forces such as Vodafone acquiring Mannesman in 2009 for over US$190bn. Vertical M&A is driven by companies looking to improve production capabilities and costs. Typically, this is achieved by acquiring smaller manufacturers of parts used in production or purchasing software companies and integrating them to improve the service provided.
What causes Merger Waves?
Economic expansion
Merger waves are cyclical events and typically occur in periods of economic expansion. In normal conditions, companies typically aim to grow organically by expanding business operations to meet growing customer demand. During boom periods, growth can be acquired at a much faster rate using M&A. Companies will seek to purchase external businesses which will support and accelerate their own growth plans. These may be competing or complimentary businesses or offer some kind of synergies from outside the industry. Merger waves are driven by this heightened demand.
Industry change
Any structural change within an industry can provoke a merger wave. This may be improvements in production or manufacturing or changing process in some way. Often rising costs of production or costs can lead to M&A activity to remain competitive, or there may be new market opportunities which can create attractive acquisition opportunities.
Technology shocks
Technology can be a key driver of M&A activity as rapid changes and improvements in technology can result in major changes to business models. Ever-changing technology can create new sub-sectors, industries and create huge growth opportunities in previously untapped markets. Similarly, technology can impact incumbent operators who need to ‘move with the times’ and may seek M&A to stay competitive.
Regulatory shocks
Changes in regulation within a country or industry can contribute to a merger wave. Following major regulation changes, there can follow a period of M&A activity where the sector consolidates to fit new business models to operate in the new environment. These shocks may include creating or removing regulatory barriers which impacts those who can and can’t operate within the sector.
Largest single M&A Deals
The largest M&A deals in history are notable not only for their staggering financial values but also for the strategic realignments created. From telecom giants consolidating their dominance to pharmaceutical companies expanding product portfolios, each of these monumental deals tell a unique story of corporate ambition and industry evolution.
Access the free download to see the ten largest US and European M&A transactions in history. Our free download will examine their backgrounds, strategic motivations, and the subsequent impact on the global business landscape.
Conclusion
Merger waves describe periods of heightened M&A activity. They are typically cyclical patterns that occur during times of economic growth and high stock market valuations driven by increased demand. There can be many sector-specific reasons for M&A activity largely covered by regulatory change or desire to remain competitive in the marketplace. Technological change has been a lead driver of M&A activity over the years as it has created plenty of opportunities for consolidation and both horizontal and vertical mergers. Ongoing globalisation also drives mergers waves as it creates new economies of scale and allows companies to acquire assets and operate in many markets beyond the domestic base.
The largest mergers and acquisitions in history have significantly reshaped the global business landscape, demonstrating both the potential benefits and challenges of such massive corporate endeavors. These transactions, ranging from Vodafone’s acquisition of Mannesmann to the merger of AB InBev and SABMiller, highlight the strategic maneuvers companies undertake to enhance market position, achieve operational synergies, and drive growth.
Ultimately, the history of these monumental M&A transactions offers valuable lessons for future corporate strategies, emphasizing the importance of thorough due diligence, clear strategic objectives, and effective post-merger integration plans. As the business environment continues to evolve, M&A will remain a pivotal aspect of corporate growth and transformation.
Additional Resources
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