A merger takes place when the firms involved in the combination are of unequal size. The larger or stronger firm continues to exist because of its stronger bargaining power and the smaller or weaker firms go out of existence.
Four periods of economic history have witnessed very high levels of merger activity, which are called a merger waves. These periods are characterized by cyclical activity i.e. large number of mergers followed by relatively fewer mergers ((ICMR), 2003). The current period is called as the fifth wave. In the first three waves, merger activity was concentrated in the United States of America. The fourth and the fifth waves were global in nature though the impact of the wave is most pronounced in the United States of America.
The first merger wave occurred after the depression of 1883. It peaked between 1898 and1902 though it began in 1897 and ended in 1904. The merger had the greatest impact on eight specific industries i.e. primary metals, bituminous coal, food products, chemicals, machinery, transportation equipment, petroleum and fabricated metal products. These industries accounted for almost two – thirds of the total mergers during these periods.The mergers in the first wave were predominantly horizontal combinations. These resulting industrial consolidations led to creation of large monopolies. For example, US steel founded by J P Morgan merged with Carnegie Steel founded by Andrew Carnegie.The merged firm US Steel also acquired several other smaller steel producers and the resulting giant capture 75% of the steel market of the United States of America.
The second merger wave occurred between 1916 and 1929. George Stigler, a winner of the Nobel Prize in Economics, has contrasted the first wave as "merging for monopoly" and the second wave as "merging for oligopoly." The consolidation pattern resulted in the emergence of oligopolistic industrial structures. The second wave was primarily fuelled by the post World War I boom in America Economy and a buoyant capital market.
The second merger wave lasted until the Great Depression. The wave ended with the stock market crash on the "Black Thursday" i.e. October 29th of the year 1929, when the stock market witnessed one of the steepest stock price falls in history.
Some of the corporate giants like General Motors, International Business Machines (IBM), Union Carbide, and John Deere etc., are a product of this era.
The third merger wave occurred during 1965 to 1969. This wave featured a historically high level of merger activity. One of the reasons for this factor is that this wave occurred in the background of a booming American Economy. One of the new trends started by this wave was the acquisition of larger companies by smaller companies. In the waves prior to this, the acquirer was always bigger in size than the target.
A large proportion of transactions that took place during this wave were conglomerate transactions. The conglomerates formed during this period were highly diversified and simultaneously operated in several unrelated industries. For example, during the sixties ITT acquired such diversified businesses like car rental firms, bakeries, consumer credit agencies, luxury hotels, airport parking firms,