ABSTRACT
Figure 8.1 records the number of mergers occurring in each year for the United States over the last century. In recent years this number dwarfs those from the end of the nineteenth century, just as the size of the US economy dwarfs the US economyof a century ago. Relative to the size of the economy, the first greatmerger wave was roughly comparable in scope to that of the late 1980s (The Economist, April 27, 1991, p. 11). The wave in the late 1990s was unprecedented, however, in terms of the number of mergers, their size, and their international character. If one ignores the upward trend in the number ofmergers, two remaining features
of merger activity stand out immediately. First, and most obviously, mergers come in waves. In the late 1890s, 1920s, 1960s, and 1980s the numbers of mergers
The far exceeded their levels in the early years of the following decades. The same appears to be true for the wave of the late 1990s. Second, all these waves have tended to be correlated with stock market prices and economic activity. The Great Crash in stock market prices on Wall Street was accompanied by a great crash in merger activity. Careful econometric work has established that stock prices tend either slightly to lead or coincide with the number of mergers.1 A similar pattern of merger activity and relationship to stock prices has been observed for the United Kingdom.2 The Nobel laureate George Stigler (1950) once referred to the first great merger
wave in the United States as the wave that created monopolies. One motivation for these mergers may have been to avoid prosecution under the Sherman Act, passed in 1890 (Bittlingmayer, 1985). This law prohibited cartels and in several cases members of a cartel simply combined to form a single firm. No such anti-cartel law was introduced in the United Kingdom at this time, however, and yet this country also saw a wave of mergers at the end of the nineteenth and during the early twentieth century (Chandler, 1990, pp. 286-91). Whatever their motivation these mergers certainly did increase concentration levels in many industries, and transformed the structures of the American and British economies. Up until 1950 in the United States, and 1989 in the European Community, no
law existed that could effectively prevent horizontal mergers that fell short of creating a (near) monopoly. Prior to these dates most mergers were horizontal. The Celler-Kefauver Amendment passed in 1950 closed a gaping loophole in the 1914 Clayton Act, and made both horizontal and vertical mergers that might “substantially lessen competition” difficult to complete. The consequence was not, as can be seen in Figure 8.1, to bring merger activity to an end, but rather to divert it into mergers that were not vulnerable to attack under the antitrust laws – diversification mergers, that is, mergers between firms that neither operate in the same industry nor in industries that are vertically linked in the production chain. Suchmergers are typically called conglomerate mergers, with the connotation being that they create a conglomeration of economic activities. These mergers have also transformed the structure of economic activity. The General Foods Corporation, an early conglomerate, was formed through acquisitions of firms like Maxwell House Coffee, Jello, Birdseye, and Post Cereals, pioneering brands and market leaders in their industries. In the late 1980s, both General Foods and Kraft Foods were acquired by Philip Morris. Today, this one-time specialist in cigarette manufacturing has joined conglomerates Lever Brothers and Nestles to become one of the largest, diversified food and consumer products companies in the world, all as a result of mergers. What explains these and other mergers, and what are their economic conse-
quences? These are the questions that will concern us in the present and following chapters. We begin by examining a number of hypotheses that have been put forward to explain why mergers occur. When considering each of these, the pattern of merger activity presented in Figure 8.1 should be kept in mind. Any general theory of mergers must be consistent with their occurring in waves, which in turn are correlated with stock market upswings.
