mortgages and loans

Valuations get way out of line during such times, and this was surely the case in both the 1920s and the 1990s. The result was the same in both cases, as well: a market crash (in one case abrupt, in the other prolonged) and an end to the merger movement of the time. The merger wave of the 1920s was fueled by excessively rising stock prices. The nature of most of the mergers of the decade was vertical. The antitrust laws in place at the time could be used to successfully attack horizontal mergers. However, these laws and those who were charged with the duty to enforce them lacked either the power or the will to attack vertically-based mergers. Accordingly, companies began integrating from the raw material phase to the consumer phase, and those kinds of mergers were not as successfully attacked as horizontal mergers. As might be expected, the stock market crash of the late 1920s and the market and economic depression that followed in the 1930s brought an end to the second merger movement.

Investors were generally uninterested in stocks during the World War II years of the 1940s and the Korean War years of the early 1950s. However, by the end of the 1950s, equity buying came back a bit. By the early to mid-1960s equity prices retained and held the levels of market peaks of the late 1920s and different kinds of mergers started coming about. These forms of mergers have persisted in various ebbs and flows to the present time: conglomerate mergers. These forms of mergers are neither vertical nor horizontal, as was the case in the two earlier merger waves.

Conglomerate-type mergers, which are very difficult to attack with the traditional application of the antitrust laws, became the state-of-the-art merger form in the 1960s. Once again, rising stock prices and, at times, a detachment of share value and price provided a currency by which such mergers could be accomplished. Earnings per share calculation (net income divided by shares outstanding) became a common form of financial analysis at the time, and, as long as an acquiring firm bought a company with a lower price/earnings ratio, they could be pretty well assured, simply on a mathematical basis, of increasing their earnings per share through the merger.

Interesting also is the frequent use of the security form favored at the time to accomplish many of the mergers of this era. Convertible securities came into common use and were most popularly employed in the most recent merger wave. Such securities, while not strictly common stocks, were convertible into common stocks, often with unique and arcane conversion privileges.

These securities fueled the third merger wave and were predominantly responsible for coining the title of the most recent merger movement as the “funny money merger movement.” This merger wave, with various fits and starts, continued through the 1990s, but was brought to a conclusion by the bear market that followed.

Accordingly, the three merger waves in U.S. financial history have some differences in merger forms (horizontal, vertical, and conglomerate) and financing methods, but also some commonalties in being fueled by irrational stock market exuberance and ending in cataclysmic events.

There were three merger waves (or major merger movements) in U.S. financial history. Interestingly, these three separate waves emphasized different forms of business combinations and financing methods, but similar causes for their cessation in terms of overriding events.

The first such wave was horizontal in character, used European capital (principally British), began in the last years of the 19th century, and was ended in 1914 by the onset of the hostilities of the First World War (then called the Great War). Unknown to many at the present time is that the mergers that were consummated during this time brought together many of the great industrial aggregations of today – IBM, General Motors, U.S. Steel, and others were each put together during that time. These mergers were largely created by buying out competitors: John D. Rockefeller, who had earlier put together Standard Oil, offered to either economically kill off his competitors or buy them out. Paradoxically, those who were forced to “invest with him” did very, very well.

The merger movement of the 1920s was quite different in all respects noted. This second merger wave was assisted by a philosophy of the time of buying stock that came back in the 1990s, the so-called “one bigger fool philosophy” of investing. It didn’t matter (as also occurred in the 1990s) how high a price you paid, as long as you bought a “growth company’s stock.”

The method of identifying a “growth company” or the valuation technique employed was not nearly so important as the field the company was in. In the 1920s the business area in vogue was technology connected to radio waves. While most stocks during that decade rose out of all proportion to value, radio was the “pet” technology of the time. If this sounds alarmingly similar to the stock market exuberance of the 1990s, it is common to almost all market bubbles. It almost didn’t matter in the 1920s and 1990s what you paid for a stock. As long as you bought a growth company’s stock, you would benefit, because regardless of what you paid, you’d find a bigger fool to sell it to, someone who would be willing down the road to pay a higher price. Obviously, that is foolish almost beyond comprehension. But this type of financial analysis (non-analysis would be more proper) is the norm during stock market bubbles.