Major Merger Movements

Four major waves of mergers have swept our economy in the last century. Each torrent of mergers arose out of the economic conditions and the legal climate of the times.

• The First Wave: Horizontal Mergers John. D. Rockefeller, Andrew Carnegie, Cornelius Vanderbilt, J. P. Morgan, and other tycoons en­gineered much of the first wave of mergers around the turn of the last century, aggressively trying to consolidate oil, steel, railroads, sugar, finance, and other industries. Corporate hold­ing companies known as trusts permitted these men to gain control of vast amounts of capital. History is filled with colorful stories about their chicanery in trying to acquire the assets of com­petitors.

The vast majority of mergers and acquisi­tions during this period were horizontal mergers; absorbing direct competitors can be a shortcut in attaining market dominance. Such giants as U.S. Steel, General Electric, and Standard Oil were formed. Abuse of the resulting market power was apparently routine. Perceived offenses by these major companies fomented a general outcry for restrictions on trusts, leading to the passage of the Sherman Antitrust Act in 1890, which attempted to forbid major horizontal mergers. Ironically, the courts continued to allow numerous hori­zontal mergers until loopholes were tightened by the Clayton Act of 1914.

• The Second Wave: Vertical Mergers A sec­ond irony is that the second merger wave fol­lowed passage of the Clayton Act, ending only after the Great Depression wilted corporate profits. Acquisitions during this period were pri­marily vertical, which entails gaining control over various stages of production from raw ma­terials to finished manufacturing. Firms desir­ing to grow via merger were channeled toward vertical mergers, because horizontal mergers were squelched by bans on "monopolization or attempts to monopolize." Horizontal mergers during this period were relatively trivial com­pared to the boom of monopolization that oc­curred during the first great merger wave.

• The Third Wave: Conglomerates The stock market crash of 1929 vaporized prospects for promotional profits, and slack demands for out­put during the Great Depression curtailed mergers based on economies of scale. Figure 3 shows that the merger rate fell drastically and remained low until the third big wave appeared late in the 1950s, again, paradoxically, on the heels of major antitrust legislation, the Celler-Kefauver Antimerger Act of 1950. This third wave lasted into the early 1970s. The bulk of the mergers during this period were conglomerate mergers, which combine firms from unrelated in­dustries. For example, DuPont's (a chemical company) 1982 acquisition of Conoco Oil was a conglomerate merger.

• The Fourth Wave: Corporate Raiders Merger activity was subdued through the 1970s, but the perception that the Reagan administra­tion was sympathetic to corporate raiders re­newed interest in mergers. Antitrust guidelines announced in 1982 fostered conglomerate mergers and also allowed horizontal or vertical mergers that would have been challenged by earlier administrations. During the 1980s over 31,000 mergers and acquisitions with a total value of $ 1.34 trillion were consummated.

The late 1980s and early 1990s witnessed both mergers and their flip side, voluntaryre­structuring - the jettisoning of bad acquisitions. Nearly 30% of all acquisition activity in the 1980s (roughly 10,000 deals) involved selloffs of cor­porate assets. Today, many firms are scaling back to do what they do best. 3832 digits

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