Arguments for and Against Mergers and Cyclical Patterns

Arguments for and Against Mergers and Cyclical Patterns

The increase in mergers during certain periods and a decline in merger activity during others is a mystery in the financial world and many theories have been put forward to explain this phenomenon. An increase in merger activity occurs in cyclical patterns and it last for several years before a decline. Mergers take place when two or more companies make a deal to unite and form one entity. This paper provides a critical analysis of the arguments in favor of and against mergers. The different merger waves in the U.S. which have occurred since the 1890s to the present are analyzed. Moreover, different merger types including conglomerate, vertical and horizontal are evaluated to identify their advantages and shortcomings.

Cyclical Patterns of Mergers

Mergers have normally taken place in cyclical patterns which are referred to as waves. There have been phases of increased merger activity after which there have been periods of fewer mergers (Barkoulas, Baum & Chakraborty 2001). Price, earning ratios and share prices increase during merger waves (Komlenovic, Mamun & Mishra 2011). In U.S. history, several merger waves have been identified.

The first merger wave began in the late 1890s and it occurred between 1897 and 1907. The merger wave came after the 1883 Depression (Harford 2005). During this wave, there were many horizontal mergers, which led to the high concentration of industries such as transportation, mining, food products, metals, and petroleum products (Rhodes‐Kropf & Viswanathan 2004). As a result, there was a creation of monopolies. Several monopolies were charged with the violation of the 1890 Sherman Antitrust Act.

The second merger wave occurred between 1916 and 1929. It started during World War I until the 1929 stock market crash. The mergers during this wave were more vertical than horizontal due to increased government scrutiny. The 1914 Clayton Act was added to the Sherman Act to regulate the mergers. Therefore, the mergers were mostly oligopolies as opposed to monopolies.


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