• Mergers


• Leveraged Buyouts

Definition: Late twentieth century industry that arose to facilitate corporate mergers, leveraged buyouts, liquidations, and other forms of business reorganizations
Significance: As the variety of business mergers became more complicated, a new industry arose from businesses designed to provide specialized accounting and legal and financial expertise that would facilitate all manner of reorganizations. In principle, these firms were supposed to act as neutral parties to aid all parties involved in mergers to gain fair and equitable evaluations of the assets of the parties, but genuine neutrality has not always existed.
Early in American history, colonial charters were sometimes based on joint-stock companies, but most early American businesses were either sole proprietorships or partnerships with very simple legal structures. No assistance beyond perhaps that of an attorney was needed to combine or dissolve most business structures. Over the next two centuries, the legal structures became more complex, and the various kinds of mergers required more legal and accounting assistance.
During the late nineteenth century, many businesses merged into what became known as trusts or holding companies. Some of these clearly aimed at monopoly control of certain sectors of the economy. By the first half of the twentieth century, concern that mergers were producing monopolies with too much economic power had led to these monopolies either being broken up or subjected to increased regulation. From that moment, mergers required sophisticated accounting, financial, and legal services to achieve their objectives. The antitrust and regulatory environment limited the number of successful mergers. During the 1980’s, the administration of President Ronald Reagan successfully pushed for substantial deregulation of the financial industry, and various forms of mergers again became popular. Because mergers were once again attractive, an entire industry grew up fromthe specialized services needed for complex mergers.

Mergers

Mergers may be combinations of two willing partners of roughly the same size or they may be acquisitions of smaller companies by larger companies. Sometimes mergers are of successful companies acquiring distressed or insolvent companies; these are popularly known as liquidations. Mergers may be vertical or horizontal integrations or conglomerations. Conglomerations involve the joining of unrelated businesses. Their main business advantage is that they may allow for more efficient allocation of capital.Ahorizontal integration is the merger of two or more businesses in the same sector with similar modes of production. The aim is to reduce competition, and therefore, the approval of the antitrust division of the U.S. Department of Justice has often been required. Vertical integration is the merger of one or more businesses representing different stages of the production of a final product. Although vertical integration may raise monopoly concerns and require Justice Department clearance, this type of integration can usually be justified because of reduced transaction costs and therefore is easier to achieve.

The AOL Time Warner building in New York. The 2000 merger of AOL and Time Warner ended in a goodwill write-off of AOL in 2002, after the value of the Internet company fell. (AP/Wide World Photos)

Leveraged Buyouts

Leveraged buyouts are a type of merger that may represent either vertical or horizontal integration. The key issue in the leveraged buyout is that the purchaser does not have sufficient cash to directly buy the target or a controlling share of its stock. The purchaser can overcome this problem by borrowing money and using the assets of the business being purchased as collateral for the loan. After completing a leveraged buyout, the buyer often sells off units of the purchased company to pay back the loan.
Targets of leveraged buyouts frequently resist being taken over because they oppose having their assets broken up and sold in this way. In such cases, leveraged buyouts are known as hostile takeovers. Leveraged buyouts of businesses of all sizes were popular during the 1980’s, when about two thousand companies with assets totaling about $250 million were bought out. During that same decade, some controversial hostile takeovers occurred that helped give the profitable merger industry a poor reputation.
During the 1990’s and the early twenty-first century, leveraged buyouts and hostile takeovers, along with a variety of other mergers, remained popular. However, some of these leveraged buyouts were based on inflated evaluations of the assets of the companies being acquired. When enough such buyouts took place at the same time, they created various economic bubbles that ultimately burst, creating instability in the larger financial markets. The first of these was the dot-com bubble that began during the late 1990’s and continued into the next decade. Only a few years later, a comparable bubble involving subprime mortgages led to first a burst bubble and then a crash, creating a very difficult situation for investment banks, the mortgage industry, and the real estate market. Nonetheless, the merger industry has continued to play a significant role in the financial sector.

Further Reading
Baiman, Ron, Heather Boushey, and Dawn Saunders. Political Economy and Contemporary Capitalism: Radical Perspectives on Economic Theory and Policy. Armonk, N.Y.: M. E. Sharpe, 2000. Collection of essays that examines mergers and leveraged buyouts from a perspective sympathetic to socialism.
Burrough, Bryan. Barbarians at the Gate. New York: Harper & Row, 1990. Study of the leveraged buyout of a large tobacco company that became such a well-known example of a hostile takeover that it was made into a Hollywood film with the same title as the book.
Johnston, Moira. Takeover: The New Wall Street Warriors— The Men, the Money, the Impact. New York: Arbor House, 1986. Still one of the best studies of the merger mania of the mid-1980’s; however, it was written before some of the biggest and most important deals were concluded.
Levinson, Marc. The Box: How the Shipping Container Made theWorld Smaller and theWorld Economy Bigger. Princeton, N.J.: Princeton University Press, 2006. A detailed analysis of a famous merger with some positive consequences.
Smith, Roy C. The MoneyWars: The Rise and Fall of the Great Buyout Boom of the 1980’s. New York: Dutton, 1990. Clear and well-informed discussion of the takeover movement of the 1980’s.
Stewart, J. B. Den of Thieves. New York: Simon & Schuster, 1991. Critical examination of the merger, acquisitions, and leveraged buyout industry.
Wasserstein, Bruce. Big Deal: Mergers and Acquisitions in the Digital Age. Rev. ed. New York: Warner Books, 2001. History and tactics of media corporate mergers, with emphasis on businesses and personalities behind the scenes.
See also: bankruptcy law; Federal Trade Commission; Incorporation laws; Petroleum industry.