C39CN - Past Exam Papers.doc

It was driven by the need to consolidate highly

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It was driven by the need to consolidate highly fragmented industries which were very weak financial performers. Trusts were formed by for example JP Morgan which held shares in these companies. These trusts then ‘persuaded’ the companies to merge and refinance. It was characterised by mainly horizontal mergers. Many small firms selling in to increasingly large markets. The idea was to create large companies capable of necessary scale relative to national market size, and to exert market power. E.g. International Harverster Investment banks and holding company trusts played a major role It came to an end with the first anti-trust legislation and economic downturn The second wave was merging for oligopoly Anti-trust laws meant that direct merging for monopoly was difficult. However firms encouraged to cooperate, and many merged to achieve scale advantages, stopping just short of monopoly. Again, investment bankers were prime movers There was a need to achieve economies of scale in production It ended with the stock market crash of 1929 The third wave was the conglomerate era of the sixties It was driven by high investor confidence, reflected in high p-e ratios The belief that management was a generic skill that could be applied to any business The belief that by holding diverse portfolio of assets, conglomerate less risky The p-e game Rapid trade and economic growth The fourth wave was the 'Gordon Gekko' era of the eighties. There were; Many Hostile Mergers Size of Targets Larger Industry Trends – more mergers within certain industries Example: Oil and Natural Gas Deregulation – Banking Example: Airlines Role of the Raider – Aggressive pursuit of underperforming companies’ for bust-up or radical restructuring Emergence of Anti-Takeover strategies. A particular innovation at this time was Junk Bonds Bonds had previously only been issued at investment grade. They only acquired junk status if they performed badly. Milken’s high return junk bonds were issued at junk grade to help finance hostile leveraged buyouts It came to an end with the first gulf war The fifth wave took place from the mid-nineties to 2000 It was characterised by Emergence of private equity and the arrival of modern investment banking on the mainland of Europe. Emergence of leveraged finance” (which carries a similar risk to junk bonds, but involves loans that are not publicly traded). Also wide use of stock for stock transactions Much more activity happening outside US Merger waves in the European Union (EU) particularly the UK It came to an end with the dot-com crash DECEMBER 20
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