Successful Mergers and Acquisitions Changed Course of National Economy (Part 1 of 2)

August 24, 2011

By John Hallal

While some people call for doom and gloom during an economic downturn, we can take some solace in the fact that the U.S. economy has always experienced cyclical changes. In many cases, a downturn has enforced adjustments due to particular industries or business models. Some of these modifications triggered mergers and acquisitions that paved the way for companies to expand their footprints or product lines and for others to gain access to capital to fund growth in their core markets.

The first wave of mergers as we know them today occurred between 1897 and 1904. During this span, monumental horizontal mergers solidified companies that held major market shares in such industries as telephone service, oil, railroads, and mining. By affirming brand recognition and creating a major network of consumers and suppliers, these companies effectively pushed their challengers out of business or allowed them to snap up rival firms. Companies formed in the first wave of mergers include AT&T, DuPont, and U.S. Steel, but more than 1,800 small companies united to form organizations capable of developing infrastructure that would allow emerging technologies and production to meet consumer demand.

A later economic slowdown reduced the efficiency of mergers. By the time of the Panic of 1904, which was spurred by concerns about the nation’s banking system, banks struggled and the public felt wary of what the media touted as “big business.” Companies simply lacked the financing to continue merging. Moreover, a 1904 antitrust decision by the U.S. Supreme Court permitted the prevention of anticompetitive mergers under the Sherman Act.

While building monopolies may have motivated the first wave of mergers, the second wave related to creating oligopolies. This movement, which occurred from approximately 1916 to 1929, featured companies in such industries as foods, petroleum, transportation, chemicals, and metals banding together to create economies of scale aimed at increasing production and exports. The federal government approved these mergers because of the businesses’ impact on the American cause in World War I and because of economic benefits.

The 1929 stock market crash ended the second wave of mergers. By the 1940s, government tax relief and economic improvement prompted new interest in mergers similar to those of the second wave.

About the Author: John Hallal enjoys a reputation as an expert in mergers and acquisitions. In addition to his work as a Partner in the Acceleration Law Group and as a Managing Partner at Network Blue, Inc., Mr. Hallal serves as an Adjunct Professor at Babson College, where he teaches a course in mergers and acquisitions.

 

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