BY EVA CHENG
There has been such a big wave of domestic and cross-border corporate mergers and takeovers in the last few years that some commentators have started comparing their importance with the merger wave that took place in the US around the end of the 19th century and which marked the transition from freely competitive, "entrepreneurial" to monopolistic, corporate capitalism.
The United Nations' World Investment Report 2000 suggests that the recent wave of cross-border mergers and acquisitions (M&As) is evidence of an emerging globalised market in much the same way as the 1898-1902 wave in the United States "helped give birth to a national market" (in reality such a market had existed for at least the previous 100 years).
The late 19th century merger wave in the US involved about half of the country's manufacturing capacity. Cartels were rampant, with collusion on price and production quantities being the major means to maintain the levels of profits which were declining under "free competition". Overproduction of goods was kept under check but excess capacity remained. In the US hardware industry alone, there were more than 50 cartels for as many specialised product lines.
The US Sherman anti-trust act of 1890 tried to tame monopolisation, but not to eliminate it. That act didn't target M&As until 1903, hence the 1898-1902 rush. After 1903, capital's problem of declining profits and overcapacity had not gone away, with the 1930s Great Depression being its strongest expression.
Two waves
Worldwide M&As — national and across borders — have been growing at an average of 42% per year between 1980 and 1999, reaching US$2.3 trillion in 1999, according to the WIR 2000. Such deals were worth about 0.3% of world gross domestic product in 1980, rising to 2% in 1990 and 8% in 1999. More than 24,000 M&As took place during the last 20 years, with the incidence and transaction value so high between 1988-90 and since 1995 that the WIR 2000 call the two periods "waves".
In terms of both the number of deals and value, cross-border M&As accounted for roughly a quarter of the total throughout the 1990s. After doubling from US$75 billion in 1987 to US$150.6 billion in 1990, such cross-border deals slowed to a total growth of only 24% in the next five years. They took off again in 1995, galloping from US$186.6 billion that year to US$304.8 billion in 1997, US$531.6 billion in 1998 and US$720.1 billion in 1999, rising by another 80% to US$508 billion during the first half of 2000.
In addition, the mega deals — defined as worth US$1 billion or over — are increasing in importance. In the four years to 1990, while they numbered no more than 1.6% of the cross-border M&As, they accounted for 40-42% of the transaction value. After hovering in the 20% region between 1991-93, their value share rose again from 40.1% (US$50.9 billion) in 1994 to 62% (US$329.7 billion) in 1998 and 69.6% ($500.8 billion) in 1999.
The bulk of the cross-border M&As took place within the developed countries — never below 77% in value terms since 1987 and peaking at 98% in the late 1980s (90% in 1999). Most transactions in the developed world were shared between the EU and the US, with the former, as a bloc, mostly playing a more important role, especially as a purchasing party.
Cross-border M&As form a part of foreign direct investment (FDI) which has also been growing rapidly in recent years. From US$37 billion in 1982, world FDI outflows grew to US$245 billion in 1990, US$347 billion in 1996 to US$800 billion in 1999. The developed countries have traditionally accounted for most of the outflows (85% in 1996) and a smaller share of the inflows (60% in 1996). But since the 1997-98 economic crisis in Asia and Russia, the developed world's share of the inflow rose significantly to 73.5% (US$636 billion) in 1999.
What is driving the rising trend of cross-border M&As? The WIR 2000 claims there are three common driving forces behind the M&A waves in 1898-1902 and now: rapid technological advances (lowering crucial technical barriers such as transport and communications); new and more efficient ways of financing; and a more conducive regulatory environment.
While these three developments are valid, they are not the prime forces driving the cross-border M&A waves.
European factor
There were more foreign takeovers in Asia after the 1997-98 economic crisis, but these deals hardly define the wave. Nor do the sales through the privatisation of public enterprises, which were rising especially rapidly in the developing countries. The bulk and the biggest of cross-border M&As took place within the developed countries — primarily between the EU and the US. What motivated them is the key to explaining the M&A waves.
Not only did the EU account for the biggest proportion of cross-border M&As, it purchased a lot more than it sold. Even the WIR 2000 points out it was mainly due to the frequent purchase of US firms by firms from the UK, which was the single biggest cross-border M&As purchasing country in 1999, adding "Excluding M&A deals involving United Kingdom firms, European cross-border M&As took place primarily within the region".
European corporations' bid to position themselves for the unifying EU market started in the mid-1980s when M&A plans were seriously contemplated in a bid to strengthen European capital's competitive position against its US and Japanese rivals. That triggered a huge amount of cross-border M&As within Europe and interest from non-European buyers — a process that is still underway. This factor goes a long way in explaining many of the EU's cross-border M&As.
In 1999, the US continued a recent trend to be the single most important target country in cross-border M&As, with the EU accounting for four-fifths of the US$233 billion assets that the US sold to foreigners, rising from less than 50% before the mid-1990s. The real motivations of these takeovers aren't easy to ascertain but the distinct competitive relations between the takeover and target firms have provided important clues.
According to the WIR 2000, 70% of the value of cross-border M&As in 1999 were deals between competing firms in the same industry ("horizontal" M&As), up from 59% 10 years ago; firms with forward or backward linkages in the production process ("vertical" M&As) stayed well below 10%, as was throughout the 1990s; with the rest being mergers of firms in unrelated fields.
Reducing productive capacity?
While firms in horizontal mergers can theoretically expand their productive capacity after the fusion, this is generally unlikely. To reduce competition by marrying with or swallowing a key competitor is the predominant motivation for such deals. This will strengthen the merged entity's position, if not dominance, against other competitors. Often, reduction of capacity is involved.
This perhaps explains why horizontal M&As are prevalent in industries of notorious overcapacity such as automobiles, armaments, pharmaceuticals, telecommunications and banking. Even the WIR 2000 concedes: "In capital and technology-intensive activities, firms may undertake M&As to remain competitive by eliminating excess capacity (e.g., automobiles or defence) and to spread huge investments... Horizontal M&As also take place in less technology-intensive industries like food, beverages and tobacco, textile and clothing ... to increase market power by reducing competition, realize scale of economies in marketing, distribution and procurement or increase negotiating power vis-a-vis buyer and suppliers as well as financial institutions."
Capital concentration is rising in industries with horizontal mergers, evident in the large number of M&As concluded by a few major corporations. During 1987-99, the 10 corporations which concluded the biggest slice of cross-border M&As accounted for 13% of the total value of all deals. Their share increased to 15% during 1996-97 to 31% during 1998-99.
The WIR 2000 continues: "The companies involved in such deals change each year, reflecting the industries that underwent consolidation in a given year. Thus, in 1999, three out of the top 10 TNCs [transnational corporations] (Vodafone Group, Mannesmann and Deutsche Telekom) were in the telecommunications industry; none of these ranked among the top 10 in the previous years. On the other hand, firms in chemicals and pharmaceuticals appeared almost every year among the top 10 TNCs during 1987-1999, suggesting a prolonged restructuring in this industry."
The distinct features of the recent M&A wave suggests that most M&As were strongly driven by attempts by corporations to overcome chronic global excess capacity in the particular industries in which they operate. Whether or not these M&As can act to ameliorate this persistent problem for corporate capitalism, depends upon the actual course of actions of the merged capitals and how far are able to "downsize" their joined productive capacities without losing the gain in cost reductions that increased capacity brings them.