Mergers and Acquisitions: Motives, Effects and Policy Implications

The emergence of large corporations and the separation of ownership from control early in this century resulted in professional managers possessing and wielding the vast discretionary power. Managerial control survived the depression of the 1930s and faced few challenges until 1970s because of the dominance of the U.S. economy in a world devastated by the Second World War. With a growing economy and a booming stock market, managers of large public corporations succeeded in achieving their goal - the maximization of corporate wealth - with impunity. They increased their own utility by refusing to exploit opportunities to create value for their shareholders through high dividends of increased leverage. They often undertook many value-decreasing acquisitions - particularly conglomerate acquisitions - that were more often than not effortlessly financed from retained earnings. The control of large public corporations by autonomous managers with broad discretion is breaking down. That is the clear implication of the unprecedented wave of bust-up takeovers, defensive restructurings and LBOs in the 1980s. This new wave of merger and acquisition activity - fundamentally disaggregative in nature - is driven by the existence of wide disparity between asset values and stock prices. As a result of rapid changes in macroeconomic environment in the 1970s and the early 1980s, the conflict of interests between corporate managers and shareholders became more and more evident/ Indeed, the new development of dissaggregative takeovers can be viewed as a market response to problem caused by the lack of effective control over corporate managers. One distinct characteristics of the contemporary takeover market is the active participation of financial institutions - pension plans, insurance companies, and mutual funds - which together now own more than 40 percent of all corporate equity. This new concentration of ownership has reversed the dispersion of stock ownership that was crucial to the preservation of managerial power and has helped financial institutions exercise effective control over companies in which they invest