Globalization spawned an unprecedented magnitude of merger and acquisition activity that will only increase. As long as there are corporations they will desire economies of scale and try to increase their market share through direct foreign investment. But this globalization will benefit the world economy by consolidating industries to realize countries’ competitive advantages. Therefore, more classroom attention must be directed toward mergers and acquisition to serve the growing need for merger and acquisition-educated human resources.
In the middle of the 1990’s large commercial and investment banks acquired small credit card companies with large volumes. In 2002, it was apparent that over the past couple of years the corporate trust industry was experiencing a trend of merging to achieve economies of scale, increase revenue, and the strategic positioning of small banks. Most sales are occurring among the shorter end of medium-sized banks, therefore smaller municipal banks were being acquired during this trend. In 2002, the U.S. had four hundred thirty-nine billion four hundred sixty million dollars in banking deals close. In 2003, it increased nineteen and five tenths percent to five hundred twenty-seven billion eight hundred forty million dollars. On a world scale one trillion two hundred ten billion dollars of deals increased ten percent to one trillion three hundred thirty billion dollars. Each quarter of 2003 gained in deals and dollar amounts (Hahn 2004). One hundred twenty-four billion or twenty four percent of the third quarter’s five hundred twenty billion resulted from Europe assuming U.S. companies with a trend of banking deals (But M&A Deals Abroad Slacken Considerably in Period). Banking mergers and acquisitions were expected to increase from 2003 to 2004. They predicted large scale sales of portfolio companies by private equity companies. Bankers are starting to act on patiently thought out deals with even year-old conceptions. These deals really complement the acquirer, they do not just add to the size.
In 1995, nine billion sixty-five million six hundred thousand dollars were spent on a total of forty-seven hospital acquisitions. In 1996, one billion two hundred twenty-one million three hundred thousand dollars were spent on a total of thirty nine hospital acquisitions. In 1997, three billion one hundred thirty-five million six hundred thousand dollars were spent on a total of thirty-seven hospital acquisitions. By 1998, the trend slowed but did not cease as only one hundred fifty million dollars were spent on a total of nine hospital acquisitions. Nineteen million nine hundred thousand dollars were financed in 1996 and twenty-six million two hundred thousand dollars were financed in 1997 a growth of thirty-two percent (Kuiper 1998). Figler acknowledged in 1998 an American Western trend from 1995 to 1998 of mergers and acquisitions taking place in continuing care retirement communities for the same purpose as hospitals. Pacific Retirement Services gained Rogue Valley Manor and California Lutheran Homes, Pacific Homes, and the Foundation to Assist California Teachers merged (Figler 1998). Overall the whole healthcare industries’ merger and acquisition deals take up twenty-nine and three tenths percent of the total deals in 2004 up ten percent from 2003. The healthcare equipment industry is consolidating as well as the healthcare facilities. Two quarters into 2004 two hundred twenty-three deals in the amount of fifteen billion two hundred million dollars were closed. There were less but bigger deals in 2004 then 2003. The writer believes that acquirers focused more on bigger distribution channels then on new products to acquire. A J.P. Morgan Chase banker pointed out that a competitive strategy being employed by bigger companies is the tendency to buy developing ideas (Abrams 2004).
U.S. and foreign companies from Israel, Canada, and Russia are noticed to be competing over convenience stores from June 2003 to November 2004 arguably because of past low valuations, an overleveraged status, and a past unwillingness to sell. But, the spurt during 2003 and 2004 is due to low interest rates and high oil prices have changed convenience store strategies (Tunick 2004).
Japan’s companies are also consolidating for similar reasons. For example, the stock market profits, corporate earnings, and sales are up. There was ten percent growth in 2005 and 2006. Industrial companies like cement, steel, oil, gas, and mining grew thirty one percent in a year. They have lots of money to use from their habit of saving a lot of money. The government is encouraging companies to buy small state owned firms because they are not performing as well as private companies. Central government owned companies decreased to one hundred sixty-one from one hundred ninety-six in three years and they want to decrease it to eighty to one hundred by 2010. As a result, two thousand two hundred sixty-three full and partial acquisitions were experienced. The deals in 2006 amounted to one hundred three billion eight hundred thousand dollars up sixty-eight percent from sixty-one billion eight hundred thousand in 2005 (Batson 2007).
As a comparison of the growth of mergers and acquisitions in the past decade data has been provided to compare the first quarter of each year starting with 1994. In first quarter 1994, the mergers and acquisitions were under two hundred billion dollars. In 1995, mergers and acquisitions were around two hundred billion dollars. In first quarter 1996, mergers and acquisitions were around two hundred forty billion dollars. In first quarter 1997, mergers and acquisitions were around three hundred billion dollars. In first quarter 1998, mergers and acquisitions were around five hundred billion dollars. In first quarter 1999, mergers and acquisitions were around seven hundred billion dollars (Thompson Financial 2006). The merger market went down in 2000 when the technology market deals failed (Berman 2007). In first quarter 2000, mergers and acquisitions were around one trillion two hundred billion dollars. In first quarter 2001, mergers and acquisitions were around five hundred seventy billion dollars. In first quarter 2002, mergers and acquisitions were around two hundred fifty billion dollars. In first quarter 2003, mergers and acquisitions were around two hundred forty-five billion dollars. In 2004, world mergers and acquisitions grossed for hundred ninety-nine billion dollars with seven thousand nine hundred sixty-five deals from January to April. In 2005, world mergers and acquisitions grossed six hundred eighty billion dollars (Thompson Financial 2006) increasing twelve percent from 2004 with one thousand two hundred sixty seven less deals (Hahn 2005). In 2006 world mergers and acquisitions grossed eight hundred eighty billion dollars an increase in forty-four and nine tenths percent (Thompson Financial 2006); there were 55 transaction over ten billion dollars (Berman 2007). In first quarter 2007 world mergers and acquisitions grossed one trillion one hundred billion dollars increasing twenty seven percent from 2006 with eight billion one hundred million dollars gained by advisement firms (Thompson Financial 2007).
Benefits of foreign direct investment on the home country follow. Mergers and acquisitions increase exposure in foreign markets to build brand and increase relations. Mergers and acquisitions increase market share, revenue, and taxes and can lower prices because labor and transportation costs decrease. Mergers and acquisitions enable better access to rare resources, and avoidance of trade barriers and volatility. However, stock prices after mergers and acquisitions may either go up or down (Berman 2007). Benefits of foreign direct investment on the host country follow. There is an increase in GDP, exports, standards, and production. Capital, technology, management, and infrastructure improvements occur. Jobs are created and wages will increase eventually. With higher competition comes lower prices. There is an increase in tax income. The country experiences less export transportation cost and achieves a competitive advantage from fully employing resources and labor. Overall, economic growth increases with foreign direct investment.
To stay on top of merger and acquisition activity the most current sources include; The Wall Street Journal, Investment Dealers’ Digest, Mergers and Acquisitions Report, Business Week, and Asset Securitization Report. Most all statistics included in each source come from Thomson Financial available at www.thomson.com ; each quarters break down and analysis is available on the website. Stay informed, because Berman quotes, “The merger boom is far from over” (Berman 2007).
M&A Erika L. LaMarch International Finance Professor Tarrago