Exhibit 4.1 presents the history of M&A activity in terms of number of deals. Exhibit 4.2 gives M&A activity in terms of constant dollar value.1 In both exhibits, the data are presented on natural and logarithmic scales—the log scales help to highlight those periods when M&A activity jumped sharply in percentage terms, such as 1895 to 1900 and 1965 to 1970. Exhibit 4.3 considers M&A activity relative to the size of the U.S. economy—this helps distinguish the materiality of successive periods of activity. Exhibit 4.4 presents some notes for the reader on the sources for the data in the graphs.
The first important insight from these graphs is that M&A activity reveals evidence of five periods of heightened merger activity; hereafter, I will call these “waves.” The appearance of waves is not isolated to the United States. A study of M&A activity in the United Kingdom also shows wavelike behavior (see Town (1992) and Resende (1999)). A study by Shugart and Tollison (1984) tested two of the time series—the Nelson and Federal Trade Commission (FTC) series—and concluded that merger activity does not deviate from a random walk—that these waves display no regularity in period or amplitude. Indeed, visually, Exhibits 4.1 to 4.3 lend credence to the irregularity of the waves. Brealey and Myers (1996) have cited the appearance of M&A waves as one of the 10 most important unresolved questions in financial economics. “What we need is a general hypothesis to explain merger waves. For example, everybody seemed to be merging in 1995 and nobody 5 years earlier. Why? … We need better theories to help explain these ‘bubbles’ of financial activity.”2 The frustration of Brealey and Myers may be explained in part by the apparent uniqueness of each wave.
EXHIBIT 4.1 Number of U.S. M&A Transactions per Year on Natural Scale and Logarithmic Scale
See Exhibit 4.4 for sources.
EXHIBIT 4.2 Dollar Volume of U.S. M&A Transactions per Year on Natural Scale and Logarithmic Scale
See Exhibit 4.4 for sources.
EXHIBIT 4.3 Dollar Volume of U.S. M&A Activity per Year as a Percentage of U.S. Gross
National Product
Based on constant U.S. dollars, 1996.
See Exhibit 4.4 for sources.
Wave 1: 1895–1904
Horizontal mergers characterized this wave. Beginning on the heels of the depression that ended in 1896, the wave coincided with a period of economic and capital market buoyancy. Firms sought to build market power in response to overcapacity induced by rapid technological innovation. The wave touched a wide variety of manufacturing industries. Examples of firms that originated in wave include DuPont, Standard Oil, General Electric, Eastman Kodak, and U.S. Steel. Stigler (1950) characterized this wave as a period of “merger for monopoly.” President Theodore Roosevelt’s decision in 1902 to enforce the Sherman Act in the famous Northern Securities case was an important turning point of the first wave. The Supreme Court’s decision in 1904 limited horizontal mergers among large competitors and took the momentum out of the trust-building trend.
EXHIBIT 4.4 Notes on the Sources of M&A Activity Series
| Study | Time Period Available | Time Period Included | Notes |
|---|---|---|---|
| Nelson (1959) | 1895 to 1920 | 1895 to 1920 | Only manufacturing and mining included; bottom cutoff limit not clear; based on firm disappearances. |
| Thorp (1941) from Nelson | 1921 to 1939 | 1921 to 1939 | Only manufacturing and mining included; based on firm disappearances. |
| FTC Overall (1981) | 1940 to 1979 | 1960 to 1979 | All deals recorded by FTC; no value totals available. |
| FTC Broad— Estimated from Golbe/White (1988) | 1940 to 1979 | 1940 to 1979 | Only manufacturing and mining included; no acquisitions by individuals or groups included; no value totals available. |
| Mergerstat | 1963 to present | 1963 to 1998 | Refer to announcements rather than completed deals; bottom cutoff limit is $500,000 in transaction value. |
| M&A Magazine | 1967 to present | 1979 to 1998 | Lower cutoff limit through 1980 was $700,000 in transaction value; after 1980 lower limit value is $1 million; includes cross-border deals involving a U.S. buyer or target. |
| Thomson Securities Data Corp. | 1983 to present | 1983 to 1999 | All completed deals of those announced; no lower cutoff limit; includes cross-border deals involving a U.S. buyer or target. |
Series Citations:
Nelson, R. Merger Movements in American Industry 1895–1956. Princeton: Princeton University Press, 1959.
Thorp, W. “The Merger Movement.” In Temporary National Economic Committee Monograph No. 27. Washington, D.C.: U.S. Government Printing Office, 1941.
Federal Trade Commission, Bureau of Economics. Statistical Report on Mergers and Acquisitions. Washington, D.C.: U.S. Government Printing Office, 1981.
Golbe, D., and L. White. “Mergers and Acquisitions in the U.S. Economy: An Aggregate and Historical Overview.” In A. Auerbach, ed. Mergers and Acquisitions, 25–47, Chicago: University of Chicago Press, 1988.
W. T. Grimm & Co. and Houlihan Lokey Howard