Dimensions of the Worldwide Merger Boom
Pryor, Frederic L., Journal of Economic Issues
The capstone of the worldwide merger activities of the 1990s occurred within the first five weeks of 2000 with the announced $165 billion planned purchase of Time-Warner by America Online and the $183 billion takeover of Mannesmann by Vodaphone AirTouch. Three other mega-mergers brought the total volume of merger activity in the same five weeks to more than half a trillion dollars. (1) Although subsequent actions by European Union's Competition Commission whittled down the size of several of these mergers, their overall volume is still impressive.
Despite the reporting of particular mergers in the daily press, it is difficult to gain perspective on merger and acquisition (M&A) activities from such anecdotal evidence. And without a quantitative view of the dimensions of this process, we cannot begin to determine whether this merger movement will lead to a permanent change in the organization of industry.
This essay has two purposes: to present data hitherto unavailable for various important dimensions of the merger tsunami in both the United States and abroad during the final two decades of the twentieth century and to draw attention to some crucial implications of these activities for the world economy. In particular, I focus on the impact on enterprise size and on industrial concentration. Although increasing industrial concentration may not necessarily signify decreasing competition, it is certainly an important component. (2) The basic information came from a business database of mergers that has seldom been employed by economists and that allows an aggregate perspective.
The analysis is straightforward. The first section focuses briefly on the database from which the basic information on mergers and acquisitions for 1985 through 1999 is drawn. The second section outlines some basic dimensions of the M&A boom both in the United States and abroad--the volume, average size, sectoral composition, and geographical distribution. The final section focuses on three issues: the short-run impact of such mergers on the changing size of enterprises; the short-run implications of such mergers on market competition, using data on the extent to which such mergers involve enterprises in the same four-digit industries; and the probability that these merged enterprises represent a permanent change in market structure.
The tables in this essay are calculated from a database of mergers and acquisitions that is maintained by Thompson Financial Securities Data (TFSD). (3) This commercial company collects information on publicly announced mergers and acquisitions in the world, using English and foreign language news sources, filings at the Securities and Exchange Commission (SEC) and its international counterparts, trade publications, proprietary surveys of investment banks, law firms, and other sources. The M&A data cover corporate transactions involving at least 5 percent of the ownership of a company where the transaction is valued at $1 million or more (after 1992, deals of any value are covered) or where the value of the transaction was undisclosed. Both public and private transactions are included.
From TFSD I purchased a listing of all M&A deals and their value as well as the names, standard industrial classification (SIC) codes, and nationality of the companies involved for 1985, 1992, and 1999. In addition, I obtained from them an aggregate time-series for the entire period from 1985 to the present. (4) Aside from straightforward mergers and acquisitions, transactions included in this database are purchases of large stakes, stock swaps, real estate investment trust (REIT) acquisitions, asset sales and divestitures, leveraged buyouts, tender offers, spinoffs and splitoffs, and so forth. These data do not, however, contain information on joint ventures, strategic alliances, or other such arrangements that may act to decrease competition (see Pryor 2001a) nor on profits resulting from such mergers. …