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M&A Titans | Brett Cole


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Published in: 2008

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M&A Titans is about the lawyers and investment bankers who created Wall Street’s M&A industry in the 1970s and 1980s. It was during this era that men like Michael Milken, T. Boone Pickens, Carl Icahn, Joe Flom and Marty Lipton would rise to the top. The book provides insight into the culture of the various investment banks and the roles of the big names that changed the entire financial industry.

THREE PREVIOUS M&A WAVES. The first wave of mergers lasted from 1893 to 1904. It was characterized by the consolidation of manufacturing and mining companies. The second wave was from 1919 to the crash of 1929 when the theme was vertical integration. In addition to car manufacturing, Ford had its own steel mills, railways and ore ships. The third wave of mergers was the conglomerate era from 1955 to 1969.

THE OIL INDUSTRY STARTED THE TAKEOVER ERA. In the early 1970s, the U.S. economy went into a recession and the stock market plummeted. OPEC had shocked the world with the first real oil price increase. But despite the fact that oil prices had soared, the share prices of large American oil producers were unaffected. This meant that it was cheaper to buy oil on Wall Street than to drill for it. In addition, inflation had caused greenfield costs to rise.

IT BEGINS IN THE 1970s. Although acquisitions have always been part of the business and finance world, it was not until the mid-1970s that concepts such as “merger departments” and “acquisition specialists” began to emerge. The Dow fell 28% in 1974, its worst year since 1937. The combination of little work and low valuations led a small group of bankers and lawyers to discover that M&A counseling could be a lucrative industry. What was also new was that acquisitions could be forced through as hostile takeovers – something that basically had not happened before.

REAGAN & VOLCKER CREATES A FERTILE SOIL. In the 1980s, Ronald Reagan was a patron saint on Wall Street. His government, which took office in 1980, had a laissez-faire market philosophy, which advocated acquisitions and mergers as they resulted in efficient capital allocation. Fed Chairman Paul Volcker also stifled inflation, thereby restoring market confidence in asset values. In the early 1980s, the underlying values of net assets in American companies were significantly greater than the companies market capitalizations.

FOREIGNERS FINDS BARGAINS IN THE US. The depressed stock market attracted foreign companies to buy American companies cheaply. They were not subject to Federal Reserve restrictions on borrowing money. The Dutch electronics giant Philips opportunistically bought Magnavox consumer electronics. That same year, the Swiss chemical and agricultural company Ciba-Geigy bought Funk Seeds International.

“If you’re trying to lead people in a competitive enterprise, what’s a more competitive enterprise than warfare? My view is that everything managerially you want to know is in military history” – Steve Friedman

WALL STREET’S BEST DECADE. In 1980, 97 acquisitions worth $18 billion were completed on the US stock market. Just eight years later, more than 3,500 acquisitions totaling $366 billion were completed. In 1982, the largest bull market in the history of Wall Street began. A part from some minor down bounces, especially in 1987, the boom lasted for 18 years.

THE KING OF JUNK BONDS. Michal Milken was one of the biggest and most infamous names on Wall Street in the 1980s. Through Drexel Burnham, he created the junk bond market and helped finance a large part of the acquisitions – friendly as well as hostile – that took place during the decade. Financiers such as T. Boone Pickens and Carl Icahn made extensive use of Drexel Burnham’s services and were thus able to quickly take on even the largest companies. Milken was one of the highest earners during the takeover era and only in the year of 1987 did he take out a salary of $550m. However, things did not end well for Milken, who in 1989 was convicted of securities fraud and conspiracy. He was fined $600m and sentenced to 22 months in prison.

“An investment banker, it’s a man that’ll hunt with anybody who’s got a gun.” – T. Boone Pickens

THE BIRTH OF POISON PILLS. In response to the hostile takeovers, in 1982, the lawyer Martin Lipton developed the embryo for what would later become known as the “poison pill”. The term derives its original meaning from a poison pill carried physically by spies throughout history, which was swallowed when they were discovered to eliminate the possibility of being interrogated by the enemy. Usually, “poison pills” were changes in the articles of association regarding how long board members serve, dividend rights to shareholders or opportunities for the board to carry out defensive new issues of shares or options.