Comparative Analysis: Merger Surge in 1960s to 1980s

Introduction

In the 1960s, a typical merger acquisition transaction was a friendly acquisition, usually paid for by the stock of the acquiring company rather than cash. Such mergers were mostly undertaken by a large corporation of a smaller public or private firm, and target companies were outside the acquiring firm's main line of business. Such unrelated diversification was common among large companies. The critical feature of the '60s takeovers, then, was unrelated diversification (Smith, 1984).

Comparative Analysis: Merger Surge in the 1960s to 1980s

However, in the 1980s, a large number of the mega companies or conglomerates that were formed as a consequence of the M&A wave of the 1960s were performing poorly, especially in the aftermath of the energy price shocks of 1974 and 1979. Takeover activity began to accelerate in the early 1980s and boomed throughout much of the decade. Takeovers in the 1980s were characterized by the heavy use of leverage. Firms bought other firms in leveraged takeovers by borrowing instead of issuing new stock or using solely cash on hand. Other firms restructured themselves, borrowing to repurchase their own shares. Finally, some firms were taken private in leveraged buyouts (LBOs). In an LBO, an investor group, often allied with compulsory management, borrows money to repurchase all of a company's publicly owned shares and takes the company private (Jensen, 1989).

The use of junk bonds increased substantially throughout the 1980s together with leveraged buyouts. In the mid- to late 1980s, more than 50 percent of the issues of junk bonds were related to takeovers or mergers (Kaplan & Stein, 1993). During this period, isolated diversification was widespread among large companies. Further, the portion of conglomerates with no dominant businesses increased to 18.7% from 7.3%. There was also a considerable move to diversification among companies that retained their core business. The driving force behind the 1960s wave was high valuations of company stocks and large corporate cash flows. However, the management was unwilling to pay out the high cash flows as dividends and, on the other hand, able to issue equity at attractive terms; therefore, they turned their attention to acquisitions. The size of the average target in the 1980s had increased extremely from the modest level of the '60s. By 1989, 28% of Fortune 500 companies were acquired, and many transactions, particularly the large ones, were hostile. Furthermore, the medium of exchange in takeovers was cash rather than stock, and they were characterized by heavy use of leverage (Shleifer & Vishny, 1991).

Characteristics of 1980s Takeovers

Firms were purchased by other firms in leveraged takeovers by borrowing rather than by issuing new stock or using solely cash on hand. Other firms restructured themselves, borrowing to repurchase their own shares. The '80s was also characterized by the latest forms of control changes, which included 'bustup' takeovers. Bustup takeovers involved the selloff of a substantial fraction of the target's assets to other firms. Another form of merger arose during this period—hostile takeover. Hostile takeovers attract strong positive and negative reactions. They typically involve major shareholders' wealth gains of the target firms. There are possible sources of takeover gains that have been identified and tested in this study. First, target shareholders can gain a major chunk of the wealth; however, less is known about bidding firms' shareholders. If they benefit, then to account for the wealth gains, operational changes analysis must come up with superior savings. However, on the other hand, if they lose, a slight shareholder wealth increase explains the phenomenon. Second, often hostile takeovers involve acquisitions of closely related firms. In this case, gains from related acquisitions are expected to come from bloated market power and superior operating efficiencies. Joint operating efficiencies can come from combined research and development, marketing, procurement, headquarters operations, and distribution. These gains might be amplified if the target is not run efficiently and is acquired by a firm with better managers who find ways to reduce costs. Third, labor costs are one of the major costs in most corporations (Berger & Ofek, 1995).

Strategies for Cost Reduction

Therefore, a reduction in these costs is an effective way to boost cash flow. Such savings can be achieved in several ways, including layoffs, hiring freezes, early retirements, reductions in future pension benefits, wage reductions, and reduced employment. It has been extensively argued by many authors that the purpose of the merger wave of the 1980s was to create more competitive and industry-specialized firms. This was done in response to increased global competition. A number of studies validate that corporate focus enlarged during the 1980s; this increase in corporate focus was often attained through divestiture as it was associated with healthier corporate performance. Hatfield et al. (1996) in their study examined whether the corporate restructuring of the 1980s really increased the degree to which incumbent firms within individual industries were specialized in that industry. As it has not been known if cumulative industry specialization increased during the 1980s, nor is it known whether the corporate restructuring of the 1980s was a determinant of change in aggregate specialization or not (Montgomery, 1994).

Conclusion

The mergers and acquisitions trends of the 1960s and 1980s reflect distinct strategies and economic conditions. While the '60s focused on unrelated diversification, the '80s saw a shift towards leveraging financial mechanisms to restructure and focus on core business operations. This evolution in corporate strategy highlights the dynamic nature of business environments and the continuous adaptation required for firms to thrive.

References:

• Berger, P. G., & Ofek, E. (1995). Diversification's effect on firm value. Journal of Financial Economics, 37(1), 39-65.
• Hatfield, D. E., Liebeskind, J. P., & Opler, T. (1996). The effects of corporate restructuring on aggregate specialization. Strategic Management Journal, 17(S1), 67-82.
• Jensen, M. C. (1989). Eclipse of the public corporation. Harvard Business Review, 67(5), 61-74.
• Kaplan, S. N., & Stein, J. C. (1993). The evolution of buyout pricing and financial structure in the 1980s. The Quarterly Journal of Economics, 108(2), 313-357.
• Montgomery, C. A. (1994). Corporate diversification. The Journal of Economic Perspectives, 8(3), 163-178.
• Shleifer, A., & Vishny, R. W. (1991). Takeovers in the 1960s and the 1980s: Evidence and implications. Strategic Management Journal, 12(S2), 51-66.
• Smith, C. W. (1984). The modern theory of corporate finance. McGraw-Hill.