The First International Merger Wave (and the Fifth and Last U.S. Wave)

This article presents international evidence on takeover activity, and uses that evidence to argue that the current takeover wave can fairly be called the first-ever international merger wave, as much or more than it can be called the fifth U.S. merger wave. I also discuss the factors that contribute to the strength of the current takeover wave and why the takeover boom has engendered so little political concern. Mergers & acquisitions (MA major stock markets are increasingly linked; and U.S.-only takeover activity in 1999 was only about 40% of the worldwide total measured by transaction value, and 30% measured by number of transactions. I also speculate on some questions raised by the current frenzy of merger activity: why now, why so much, and how long will the wave last? One reason for why so much: the political climate for takeovers is as favorable, along many dimensions, as we have seen for a long time. The current merger wave will surely end, perhaps when it is killed by a stock market crash. But it will not end because it was sabotaged by a political counterattack. * Stanford Law School, John M. Olin Program in Law and Economics. 1. Joseph H. Flom, Mergers and Acquisitions: The Decade in Review, 54 U. MiAMi L. Rav. 753 (2000). Flom reports somewhat lower numbers than I do because his data is based on completed transactions, rather than announced transactions. UNIVERSITY OF MIAMI LAW REVIEW I. THE FIRST INTERNATIONAL MERGER WAVE A. Characteristics of the Current Takeover Wave The current takeover wave (call it 1993-present) can be called the fifth in U.S. history. The first four waves, with rough dates, were:2 • 1895-1903: The creation of the great oil, steel, and other trusts, sometimes called the "merging for monopoly" wave. • 1920-1929: Consolidation in many industries, sometimes called the "merging for oligopoly" wave. • 1960-1973: Emergence of conglomerate firms and other diversifying acquisitions, sometimes called the "conglomerate merger" wave. * 1978-1989: The fourth wave isn't neatly captured in a single phrase, but included large components of hostile takeovers, bust-up and refocusing of conglomerate firms, and leveraged buyouts. These four waves can fairly be called U.S. takeover waves. Perhaps comparable takeover booms occurred in other countries at about the same times (or at other times), but if so, no scholar has mentioned this, to my knowledge. Cross-border transactions were a distinct minority. We do not know what proportion U.S. takeover activity was of the world total during the prior waves no one kept good international data. But the failure to collect data is telling apparently there was not enough activity to justify collecting it. In contrast, the current wave has a distinctly international flavor. Many of the signature transactions including Daimler's acquisition of Chrysler to form DaimlerChrysler and Vodafone's acquisition of Mannesmann were either entirely outside the United States or involved a non-U.S. party. The $180 billion Vodafone-Mannesmann transaction, between two non-U.S. firms, is the largest in history. Autos, telecoms, telecom and Internet equipment, airlines, oil, and metals (notably copper and aluminum) are examples of industries where worldwide consolidation is driving intensive takeover activity. In banking, the mergers mostly remain domestic (perhaps because banking is highly regulated), but domestic consolidation is increasingly driven by international competition. European takeover activity, fueled by the adoption of a true single market with a single currency, has soared to $630 billion in announced transactions in 1998 and $1.6 trillion in 1999. It would not surprise me if European takeovers in 2000 exceeded U.S. takeovers in dollar volume probably for the first time ever. Writ broad, the increasingly international flavor of takeovers is an 2. For expanded discussion of the first four waves, see RONALD J. GiLSON & BERNARD S. BLACK, THE LAW AND FINANCE OF CORPORATE AcQuIsrrIONS ch. 1 (2d ed. 1995 & Supp. 2000). [Vol. 54:799 THE FIRST INTERNATIONAL MERGER WAVE inevitable accompaniment to the international growth of securities markets. The U.S. economy is a shrinking portion of the world economy and the U.S. stock market, as strong as it has been, is a shrinking part of the world market, measured by market capitalization. No surprise, then, that U.S. takeovers are a shrinking share of the worldwide total. The international flavor of merger activity will almost surely be even more prominent in the next wave, whenever that may be. By then, I expect, it will no longer make sense to talk about U.S. merger waves at all. Instead, we will come to see the current wave as the first international merger wave, and its predecessor (the fourth wave) as the last distinctly U.S. merger wave. B. Data on International Takeover Activity These broad claims need to be supported with data. Figure 1 shows the percentage of worldwide, announced acquisitions that involved at least one U.S. party and also the percentage that involved two U.S. parties, from 1985 through 1999. I could not find good worldwide data before 1985. 3 The broad trend is clear. Measured by dollar value, takeovers involving at least one U.S. party have declined from 88% of the worldwide total in 1985 to 53% last year. The drop in U.S.-only takeovers is even sharper from 83% in 1985 to 41% last year. Conversely, crossborder takeovers, involving one U.S. party but not two, have jumped from 6% of the one U.S.-party total in 1985 to 23% in 1999. Data on takeover activity measured by number of transactions, rather than dollar value, tells a similar story. U.S.-only takeovers rose from 2600 in 1985 to 11,400 in 1999. Despite this rapid growth, U.S.only takeovers shrank over this period from 72% of the world total in 1985 to only 30% in 1999. To be sure, the U.S. percentage of world takeovers by transaction value is still marginally higher than in 19901991. But those years were the bottom of the trough following the fourth U.S. wave, while 1999 is a boom year. If U.S. takeovers are a declining share of the world total, then takeovers elsewhere must be increasing. Figure 2 shows where the increase is concentrated in Europe. Takeovers involving at least one European party have grown from 11% of the world total in 1985 to 47% in 1999, measured by transaction value. European takeovers are running at a high pace in 2000 as well, as the common Euro-zone currency fuels 3. Appendix I contains the data underlying the figures in text, as well as data and corresponding figures for takeover activity measured by number of transactions. 2000] 802 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 54:799 FIGURE 1. VALUE OF U.S. ACQUISITIONS, AS A PERCENTAGE OF VALUE OF WORLDWIDE ACQUISITIONS 100.0%