June 15, 2010
The Coming Merger Wave?
A couple of people have (independently) asked me recently whether or not I thought the recent build-up in cash on corporate balance sheets suggested that a new merger wave is around the corner? Sadly, I think not.
We've had a number of "merger waves" in our history - late 1890s, the 1920s, the 1960s, the 1980s, and the more recent credit bubble wave. In all these waves of merger activity, businesses were riding stock market booms, credit was cheap, and boats were rising for everyone. A rising economy can cover a lot of sins so why in those circumstances shouldn't a manager seek to expand through an acquisition. But what's happening now is fundamentally different.
Firms are hoarding cash because they're still scared. It wasn't all that long ago that managers woke up to the realization that the lines of credit they used to fund payroll might not always be there. That's a scary thought. Even scarier, Europe has been teetering on the edge of economic collapse for months with no end in sight. Add to that an environmental catastrophe in the Gulf of Mexico that appears to have no end. In response, firms have been rightly putting away cash (BW 2009 on this question) Times are definitely uncertain.
Now, that doesn't mean that all that cash isn't burning a hole in someone's pocket and that we're not going to see opportunistic add-ons or consolidations. Of course, that's going to happen. There are always going to be those - like Andrew Carnegie - consolidate when targets are in distress. Though with acceptance of takeover defenses, the hostile tender offer and the market for corporate control are not quite what they used to be.
So while there will continue to be acquisition activity, what's not going to happen is that the "party" is not going to get started again anytime soon. Acquisition activity of that type tends to ride on the coat-tails of other good economic news. With a paucity of good news out there right now, there's no reason to think that acquisition activity will lead us out.
June 15, 2010 | Permalink
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Hi Prof. Quinn,
I thought much of the merger mania during the 1890s - or, more generally, 1870s to WW1 - was focused on managing industrial output to prevent too much deflation. Wasn't much of what J.P. Morgan was doing during the late 19th Century focused on reducing or managing industrial capacity such that margins were not too severely depressed. Gentleman capitalism, I believe it was called. Today Uncle Sam saves the day, but back then guys like Morgan were trying to organize things such that nobody was made to look too bad if their business could not compete. I thought that was the main reason for that first merger mania?
I tend to think such a model might be applicable to many industries today.
But, perhaps my history is plain wrong.
Posted by: Art | Jun 15, 2010 7:51:44 AM