Merger Mania What It is How It Works History
Merger mania is frenzied deal-making activity at the top of the merger and acquisition (M&A) cycle. It involves companies paying crazy prices and using excessive debt to quickly boost revenues and profits.
Key Takeaways:
– Merger mania is frenzied debt-quelled M&A activity.
– Sometimes deal-making becomes aggressive in a fashionable industry or the whole market, causing valuations to lose touch with reality.
– Most M&A deals fail to live up to their potential and overpaying for assets increases the risk of failure.
Companies may buy or join forces with other businesses for various reasons, including economies of scale, diversification, market expansion, and reducing competition. However, advantages can lead to out-of-control M&A activity. When companies have excess cash and few investment opportunities, they turn to M&A as a quick fix. This creates a surge of buyers and merger mania, resulting in deals that destroy more shareholder value than they create.
Merger mania occurs when deal-making becomes aggressive in a fashionable industry or the entire market, causing valuations to lose touch with reality.
The term "merger mania" was coined by Ivan Boesky during the 1980s leveraged buyout and junk bond boom.
In the past, there have been famous M&A booms driven by executive vanity and empire building. Conglomerate mergers were prevalent during the mid-1950s to 1969. The late 1990s saw a technology-driven merger mania, and after 2000, there was a rush into emerging markets, commodities, and private equity buyouts.
In recent years, increased M&A activity has been observed in the U.S. healthcare, media, and tech sectors, driven by easy money and a desire to augment product development.
Today, mergers are driven by strategic and economic rationales, including spinoffs and cross-border mergers. However, investors should always be skeptical of M&A activity and watch for the symptoms of merger mania, as the failure rate of M&A is high due to poor integration and overpaying.
Overall, merger mania represents a high-risk environment in which caution must be exercised.
