Fifth wave Merger 1992-2000

Post 1990 saw best expansion of US economy and many firms were involved in M&A activities. This wave saw splurge in M&A activities and such was the magnitude of deals that 9 out of top ten costliest deals were sealed in this phase. This wave saw many cross border mergers, few hostile takeovers many horizontal merger and Most of these mergers were strategic in nature rather than blind lead. The merger deals were mainly financed by equity and most of these acquisitions were friendly with only 4% being hostile takeover.

The reasons that can be attributed to the wave were rocketing stock market which made raising equity easier and also pressured companies to take majors that will justify their heady stock price. The world was growing global and all of a sudden a large arena of markets like China, India was opening up. Companies realized that they will have to be really big to stay competitive. With time antitrust laws were also restrained. Post 1980 many corporate were well governed and this was the reason behind decreased hostility. Most of the managers were careful analyzer of if, when and how to enter market and thus looking into risk.

Going by numbers some of unthinkable mergers happened in the wave; Citibank and Travelers, Chrysler and Daimler Benz, Exxon and Mobil, Boeing and McDonnell Douglas, AOL and Time Warner, and Vodafone and Mannesmann. From a modest $342 billion of deals in 1992, the worldwide volume of mergers marched steadily upward to $3.3 trillion worldwide in 2000. The buzzword for the mergers was “Amongst the equal” but soon it was to satisfy ego and were blind number crunching Fad.

The year 2000 started with $165 billion deal of time Warner and AOL but soon it was all over. The boom in TMT(telecommunication media and technology) sector which all started in 1995 was all of a sudden halted and it impacted over all merger. Merger in TMT sector dropped from $346 billion in 2000 to $85 billion in 2001. The collapse of internet stocks, financial problem of telecom all signaled that bubble has burst. Stocks of TMT sector nose dived by 50%, junk bond were non existents, bank tightened lending standard

 The wave started on caution note but within no time stock market bubble made it mad rush, it became a fad and it has huge repercussion on investors and overall society lost $134 billion in the post wave crash. Moeller and Stulz found that out of 12000 mergers valuing $1 million or more, the merger before 2008 were mostly profitable. However, post 2008 investors acquiring lost $281 billion. Post 2008 around 80 deals lost $1 billion or more to investors.

One may wonder when it all started right; why all of a sudden it went wrong. Strong stocks made valuation lofty and P/E ratio were tempting. Most of the executives proclaimed higher valuation as their expertise rather than irregular and irrational wave of overvaluation. No doubt when it call crashed ripples were felt for long.