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In 1960s a typical merger acquisition transaction was a friendly acquisition, usually paid for by stock of acquiring company rather that cash;such mergers were mostly undertaken by a large corporation of a smaller public or private firm; and target companies were outside the acquiring firms main line of business. Such unrelated diversification was common among the large companies. The critical feature of the '60s takeovers, then, was unrelated diversification. However in the 1980s a large number of the mega companies or conglomerates that were formed as a consequence of the M&A wave of the 1960s were performing poorly, especially in the aftermath of the energy price shocks of 1974 and 1979. Takeover activity began to accelerate in the early 1980s and boomed throughout much of the decade. Takeovers in the 1980s were characterized by heavy use of leverage. Firms purchased other firms in leveraged takeovers by borrowing rather than by issuing new stock or using solely cash on hand. Other firms restructured themselves, borrowing to repurchase their own shares. Finally, some firms were taken private in leveraged buyouts (LBOs). In an LBO, an investor group, often allied with incumbent management, borrows money to repurchase all of a company's publicly owned shares and takes the company private. The use of junk bonds increased substantially throughout the 1980s together with leveraged buyouts. In the mid- to late 1980s, more than 50 percent of the issues of junk bonds were related to takeovers or mergers.
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Introduction
The American economy experienced two great takeover waves in the postwar period, first in the 1960s and the second in the 1980s. Both waves had a deep affect on the structure of corporate America. The main trend in the '60s was diversification and conglomeration. In contrast the 1980s takeover reversed the previous process and brought US corporations back to specialization. In this respects, the last 30 years were a roundtrip for corporate America. This paper is an overview of the salient features of the two takeover waves.
1.1 The 1960s Conglomerate Merger Wave
The merger wave of the 1960s was most significant since the turn of the century (Stigler, 1968). A typical characteristic of the 1960s transaction was a friendly acquisition, frequently for stock, of...