4th Wave 1981-1989

Whenever there is competition looming it takes drastic majors to propel you ahead.  Around the year 1974; when Morgan Stanley was facing challenges from its competitor in investment banking segment. Underwriting, which had constituted 95% of its business until 1965, had become less profitable as other investment banks challenged the traditional rela­tionships of the underwriting business by making competitive bids when securities were being underwritten. This attempt by Morgan Stanley to launch itself ahead saw the advent of first ever hostile takeover in 1974 when the nickel producing giant INCO acquired battery producing ESB by giving an offer for 3 hours using “Take it or leave it over “. Post 1981, merger waves saw many hostile takeovers.  This despite the fact that INCO ESB takeover was utter failure and it saw INCO breaking ESB in four parts in year 1981.

The waver merger also saw a new concept of debt financing to raise capital for merger and acquisition. While earlier most of mergers were financed by equity, mergers were financed by debt component also and we saw few billion dollar deals as well. This period saw popularization of concepts like Junk Bonds and saw increase in no. of LBOs. In over all sense this wave saw merger which were congeneric in nature and were hostile takeover popularly known as corporate raiding. Thus many investment banking firm took actively part in on behalf of these raiders as it was earning them more commission than friendly takeover.

One of the major characteristic of this wave was conflict between state government and central government. Most of the besieged companies took shelter in state government for anti takeover laws. Federal government felt that anti take over law was infringement in interstate commerce however state government thought it is right as per constitutional rights to them. Another characteristics were few international takeovers

One of the major reasons of the merger wave was inefficient management of many firms. Ineffective corporate governance and poor managerial incentives saw managerial inefficiency creeping in 1970s and 80s. Inefficiency in stock market to react in identifying inefficient firms and do away with it finally lead to new corporate control by efficient firm. Mostly once the firms where acquired their management will be renovated and profits will be withdrawn from it.

In Europe in the latter half of the 1980s companies sought to prepare for the Common Market through cross-border horizontal mergers. In the U.S. this was the period that saw corporate raiders like Boone Pickens run rampant with two-tier, front-end-loaded, boot-strap, bust-up, junk-bond, hostile tender offers until the playing field was leveled by the poison pill in the mid-1980s. However, even after the poison pill, merger activity increased through the latter part of the 1980s, pausing for only a few months after the October 1987 stock market crash. It ended in 1989-90 with the $25 billion RJR Nabisco LBO and the collapse of the junk bond market, along with the collapse of the savings and loan banks and the serious loan portfolio and capital problems of the commercial banks.


I will talk about Hostile take over, methodology and its remedy in coming sections.