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wave

Evidence to support that merger occurs in a recurring and cyclical manner

Describe about the Professional Accountant for States Business Organizations.

The current assignment deals with reviewing the occurrence of the merger in the contemporary era. This is because the merger and acquisition volumes have increased globally during the summer and autumn periods of 2016, especially in USA, which signify that mergers occur in cyclical patterns. In this context, Ahuja and Novelli (2014) remarked that a merger is a deal, which is mainly intended to combine two companies into a single firm for reaping the maximum benefits out of the market. Therefore, the assignment concentrates on finding evidences for supporting the fact that mergers take place in a cyclical and recurring manner. The last segment of the study sheds light on demonstrating that the merger activity occurs in random fashion and it could not be predicted in cyclical terms.

According to Balouziyeh (2013), the changes in the global economic conditions and business trends have indicated that mergers tend to happen in cycles. This is because the business consolidations tend to bottom out during times of economic recession due to low valuations of the firms. For instance, the merger activity between “North Star Asset Management Group” and “Colony Capital” in June 2016 and the deal between “Shire” and “Baxalta” in the same period depicts that the mergers happened in the summer season of USA.

Since the 20th century, the global economy has experienced an unprecedented wave in the merger activities. This is because the number of mergers between 1900 and 2000 has been more than thrice with the increase in the volume of transactions (Bena and Li 2014). The tentative bubble at the share markets has inflated the volume of transactions, since a number of mergers have been financed through equity exchange.

When the valuations of the banks are low, the acquirers possess little interest in utilising the shares, which are traded at discounts as currencies for deals. As a result, the acquirers tend to hold their cash back. As a result, the mergers and acquisition activities have declined significantly after 2009.

After the economic downturn, a period of FDIC-assisted transactions took place, in which the regulators contend with the banks suffering from liquidity problems. As a result, it has lead to prolonged time of bank closures, which occurred between the years 2008 - 2011 (Cartwright and Cooper 2014). In this phase, the activities related to mergers and acquisitions focus on banks going through credit problems. As a result, it has enabled the regulators to develop a process of bid for attracting the potential acquirers. This has offered the opportunity for asset consolidation along with a gain of bargain purchase at the closure of the deal (Cooper and Finkelstein 2014).

Occurrence of merger in random fashion and unpredictability of the activity in cyclical terms

According to the FDIC reports, the nation has reported incidents of above 400 bank failures from 2008 to 2011 (Custodio 2014). However, the number of incidents has declined to only 35 from 2012 to 2015, which signifies that the US banking industry has stabilised over the years. The FDIC-assisted transactions have continued to dwindle, which has been represented in the form of a table as follows:

Particulars

2012

2011

2010

2009

Advisers of large hedge funds

31

90

157

140

Table 1: Large hedge fund advisers in USA for the years 2009 - 2012

(Source: Fich, Nguyen and Officer 2015)

The above table indicates that after the global financial crisis of 2008, the merger and acquisition activities in the banking sector of USA have experienced a major setback due to the fall in valuations. Henceforth, the following evidences have been put forward to support that mergers occur in recurring and cyclical manner in the US:

First Merger Wave (1897-1907):

This was followed after the occurrence of the first global depression in 1983. Nearly 70% of all the merger activities in USA during this period were concentrated in a number of industries, which include petroleum, metals, mining, transport and food products. In this wave, the number of horizontal mergers has been considerable, which concentrated the influenced industries. For instance, in this wave, JP Morgan has merged Carnegie Steel with U.S. Steel and above 700 small steel companies. The resulting firm had controlled nearly 70-80% of steel production in the nation (Galpin and Herndon 2014). This phase was characterised as the monopoly market.

Second Merger Wave (1916-1929):

The second merger wave have begun during the First World War and lasted until the decline of the stock market on 29th October 1929. However, the governmental scrutiny has increased during this phase. The “Clayton Act (1914)” was developed as a supplementary tool for the US federal authorities to exert against the uncompetitive mergers. In this phase, the vertical mergers were more in contrast to horizontal mergers and oligopoly market structure was the main feature of this wave (Krug, Wright and Kroll 2014).

Third Merger Wave (1965-1969):

During this phase, the economic prosperity in USA had increased largely and such strong economy has helped many organisations in arranging necessary resources for acquiring the other organisations. In addition, this phase could be characterised as the phase of conglomerate mergers, since the mergers took place between the unrelated organisations (Lebedev et al. 2015). However, the horizontal mergers, which occurred during this period, had been subject to stringent antitrust enforcement in the form of a new legislation “Celler-Kefauver Act of 1950”.

Fourth Merger Wave (1981-1989):

This phase had coincided with Ronald Reagan’s presidency, in which the economic prosperity was greater from the mid to late 1980s (Moeller and Brady 2014). However, during this period, the number of hostile mergers had increased and it is in this phase that the idiom “corporate raider” made its way in the US glossary. In addition, the sizes of the mergers were relatively bigger in comparison to the previous period, in which debt financing was used to fund mergers.

Fifth Merger Wave (1993-2000):

This phase had occurred after the economic downturn of 1990-91 under the presidency of Bill Clinton. The level of mergers in this phase was identical to that of the previous phase; however, the hostile takeover had diminished. In addition, the mergers occurred in this phase aim to ensure broader business strategies instead of short-term financial profits. Finally, debt financing has been minimised in this phase to fund merger activities. 

It has been a major debate that mergers do not follow any cycle; rather it occurs in random fashion. Therefore, the mergers are unpredictable in nature, which could be validated by considering a wide array of factors, as depicted below:

Difference in merger:

In the words of Girasa (2013), mergers depend on a variety of influential dynamics from the business rationale to the personnel involved in conducting the same. The strategies over time by following the previous trend could backfire, if there is a change in the market scenario or variation in cultures of the two firms. Even the personnel, who have witnessed many previous mergers, might find it complex to foresee the future performance. This is because they would review the past mergers, which have failed miserably and apprehend the worst upshot.

In addition, such personnel would share such scare incidents with their other colleagues. This mainly happens when the news about the merger is leaked, which might be intentional or unintentional on the part of the management. Along with this, the absence of adequate formal communication from the top management has attributed to the perceptions of the personnel. For instance, the cultural differences between New York Central and Pennsylvania Railroad have resulted in failure of the merger, which occurred in 1968 ((Fomcenco 2015).

Partner sizes:

It is generally assumed that the bigger and successful firms acquire the smaller companies. However, there are many difficulties associated with such mergers, which mainly confront the employees. The most inherent problem is the low involvement of the employees in the new firm in contrast to the old one. In addition, the CEO of the large firm might not have any sort of interest or knowledge about the small business. As a result, the employees lose their beliefs regarding their company stake, which leads to increased turnover rates. For instance, the hedge fund investor, Eddie Lampert, has acquired the struggling business of Sears and merged his own company, Kmart with the former. However, the lack of long-term vision, strategies and turnover of the employees has resulted in merger failure, which occurred in 2005 (Mulherin 2012).     

On the other hand, when a new entrant, who is relatively of smaller size, inherits a large DIY chain of US, the foremost thing considered on the part of the staffs of the acquired company is the shelf measurement prior to re-badging. As a result, the staffs associated with the large chain undergo many complexities, when it comes to terms regarding the fact that the inexperienced minnow had chewed the successful firm (Weber and Yedidia Tarba 2012). Thus, mergers could not be predicted by following the cyclical pattern.

Nature of the merger:

Although the staffs expect the worst outcome in majority of the mergers, the perceptions have changed over time. This is because they believe that the new management would be more efficient to meet their needs in contrast to the existing management. However, despite having a thorough insight of the rationale, the staffs might apprehend the negative impact of their career growth, and thus, they might not be ready to accept the change. For instance, the merger between Daimler and Chrysler in 1990 had failed due to payment and bonus-related issues (Stahl 2013).

In addition, another unpredictable constituent of mergers is the technique through which the individual staffs would respond to such situation. For instance, rationalising the clerical functions implies that many staffs of the acquired firm might be redundant. The firm has realised the thin opportunities of employment in the vicinity and accordingly, it undertakes liberal redundancy payments. Although the employees might not be satisfied initially losing their work, they might be excited to see another firm opening the identical facility in the same location. This is because the new firm would recruit all the redundant staffs within three months on flexible terms in contrast to the previous employer. However, this situation is purely coincidental in nature and hence, the mergers could not be anticipated by following a pattern of cycles.

Economic conditions:

The global economic condition is another significant attribute, which might restrict the ability to predict the occurrence of the mergers. Although there have been many successful mergers in the different phases, there are instances, in which the mergers between two companies have been successful even during times of economic downturns. For instance, the merger between Cintas and Aktenmuhle GmbH in 2008 has been successful despite the global recession, which confronted the international countries. The new valuations have been ensured by tailoring the targets before the merger, which has benefitted both the companies largely. Hence, the successful mergers could only be achieved during the phases of economic prosperity do not stand tall. This implies that the mergers could not be predicted cyclically and they occur in a random fashion.

Conclusion:

Based on the above discussion, it has been found that the fluctuations in the global economic conditions and modified business trends have enabled the merger activities to be predictable over time. In order to support that the merger activities happen in cyclical patterns, several instances have been put forward to validate the statement. One such example includes fall in the large hedge fund advisers from the years 2009-2012, after the US economy has started to recover from the global economic recession. In addition, increase in the reporting incidents of bank failures during the recessionary period reflects that successful mergers could not be conducted during this phase. This is further supported by laying down brief explanation of certain merger waves in US based on their characteristics and time horizon.

However, arguments have been framed in this assignment as well to demonstrate that mergers occur in a random fashion and they could not be anticipated through recurring patterns. The most common example framed to support the argument is the merger between Cintas and Aktenmuhle GmbH in 2008, during which recession has hit the global economy. This is because of proper planning strategies and long-term vision. Finally, the partner sizes, nature of the merger, cultural differences and economic conditions are the other significant factors, which gainsay the cyclical pattern of merger activities. Hence, it could be inferred that though the merger activities have certain factors in common, it varies from perceptions to perceptions and  goal-setting strategies of the two firms. 

References:

Ahuja, G. and Novelli, E., 2014. Mergers and acquisitions and innovation. https://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199694945.001.0001/oxfordhb-9780199694945-e-026

Balouziyeh, J.M., 2013. Mergers and Acquisitions. In A Legal Guide to United States Business Organizations (pp. 91-96). Springer Berlin Heidelber  https://link.springer.com/chapter/10.1007/978-3-642-37907-9_10

Bena, J. and Li, K., 2014. Corporate innovations and mergers and acquisitions. The Journal of Finance, 69(5), pp.1923-1960. https://onlinelibrary.wiley.com/doi/10.1111/jofi.12059/full

Cartwright, S. and Cooper, C.L., 2014. Mergers and acquisitions: The human factor. https://books.google.co.in/books?hl=en&lr=&id=mw6jBQAAQBAJ&oi=fnd&pg=PP1&dq=Cartwright,+S.+and+Cooper,+C.L.,+2014.+Mergers+and+acquisitions:+The+human+factor.+&ots=c8etymbAyI&sig=ltrlwJb7Cchlkljie17JxYH3ziI#v=onepage&q&f=false

Cooper, C.L. and Finkelstein, S. eds., 2014. Advances in mergers and acquisitions (Vol. 13). Emerald Group Publishing.  https://books.google.co.in/books?hl=en&lr=&id=_2OtBAAAQBAJ&oi=fnd&pg=PP1&dq=Cooper,+C.L.+and+Finkelstein,+S.+eds.,+2014.+Advances+in+mergers+and+acquisitions+(Vol.+13).+Emerald+Group+Publishing.&ots=cfx6SsMm4F&sig=yQguDfWV7YZpMYBJhyNf_OwtFME#v=onepage&q&f=false

Custodio, C., 2014. Mergers and acquisitions accounting and the diversification discount. The Journal of Finance, 69(1), pp.219-240. https://onlinelibrary.wiley.com/doi/10.1111/jofi.12108/full

Fich, E.M., Nguyen, T. and Officer, M.S., 2015, March. Large wealth creation in mergers and acquisitions. In AFA 2013 San Diego Meetings Paper. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2020507

Fomcenco, A., 2015. Mergers & Acquisitions. https://www.forskningsdatabasen.dk/en/catalog/2291883403

Galpin, T.J. and Herndon, M., 2014. The complete guide to mergers and acquisitions: Process tools to support M&A integration at every level. John Wiley & Sons. https://books.google.co.in/books?hl=en&lr=&id=_17BAwAAQBAJ&oi=fnd&pg=PA133&dq=Galpin,+T.J.+and+Herndon,+M.,+2014.+The+complete+guide+to+mergers+and+acquisitions:+Process+tools+to+support+M%26A+integration+at+every+level.+John+Wiley+%26+Sons.+&ots=c6IhNcu2Xu&sig=Kg0mtq6HGuOYdDi6kMwBZ5yvmSQ#v=onepage&q&f=false

Girasa, R., 2013. Mergers and Acquisitions. In Laws and Regulations in Global Financial Markets (pp. 73-116). Palgrave Macmillan US. https://link.springer.com/chapter/10.1057/9781137345462_3#page-1

Krug, J.A., Wright, P. and Kroll, M.J., 2014. Top management turnover following mergers and acquisitions: solid research to date but still much to be learned. The Academy of Management Perspectives, 28(2), pp.147-163. https://amp.aom.org/content/28/2/147.short

Lebedev, S., Peng, M.W., Xie, E. and Stevens, C.E., 2015. Mergers and acquisitions in and out of emerging economies. Journal of World Business, 50(4), pp.651-662. https://www.sciencedirect.com/science/article/pii/S1090951614000716

Moeller, S. and Brady, C., 2014. Intelligent M & A: Navigating the mergers and acquisitions minefield. John Wiley & Sons. https://books.google.co.in/books?hl=en&lr=&id=H9mYAwAAQBAJ&oi=fnd&pg=PT11&dq=Moeller,+S.+and+Brady,+C.,+2014.+Intelligent+M+%26+A:+Navigating+the+mergers+and+acquisitions+minefield.+John+Wiley+%26+Sons.&ots=7MfapQI1nr&sig=f4f66Ste_PURY48_cCp6BUzXgfQ#v=onepage&q&f=false

Mulherin, J.H., 2012. Mergers and Acquisitions. Edward Elgar Publishing. https://econpapers.repec.org/bookchap/elgeebook/15061.htm

Stahl, G.K., 2013. The role of trust in mergers and acquisitions: a conceptual framework and empirical evidence. Handbook of Research on Mergers and Acquisitions, p.1.

Weber, Y. and Yedidia Tarba, S., 2012. Mergers and acquisitions process: The use of corporate culture analysis. Cross Cultural Management: An International Journal, 19(3), pp.288-303. https://www.emeraldinsight.com/doi/pdf/10.1108/13527601211247053

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