Macroeconomic and microeconomic approaches to the analysis of merger waves in the UK
This study attempts to improve our understanding of the nature of mergers and\ud their timing. It is motivated by the inability of empirical evidence at the microlevel\ud to provide strong statistical results for the motivation of mergers in different\ud periods. At the macro-level, the apparently stronger results of some studies have\ud been insufficient to form the basis for a widely accepted theory of merger timing.\ud Although the predictions are closer to the observed procyclical and episodic\ud behaviour of the process, the findings of the macro-literature have been limited,\ud in most cases, to confirmation of what is evident by casual observation.\ud This study purports to create a framework that encompasses both the macro- and\ud micro-environment of a company which may enhance understanding of the\ud dynamic behaviour of merger activity in the UK. At the macro-level, we use\ud frequency domain techniques to empirically examine the existence of merger\ud waves and their relation to economic fundamentals. The empirical approach\ud taken allows the identification of merger waves with different duration,\ud regularity, and power, and reports their relation to macro- and financial factors\ud along these waves. Having identified the explanatory power of macro- and\ud financial factors, as well as the timing pattern of aggregate mergers, we search\ud for complementary driving forces of the process at the micro-level.\ud At the micro-level, a theoretic-decision model is constructed to explain merger\ud timing which incorporates the most prevalent theoretical and empirical\ud explanations, suggested by industrial organization and finance literature, into a\ud dynamic framework. The model exploits the dynamics of the merger process by\ud assuming that motives change over time because of changes in firm-specific\ud characteristics and in merger activity per se. The model stresses the endogenous\ud character of mergers by explicitly incorporating past, current, and future mergers.\ud The theoretical model is estimated, using merger data from the UK from 1990 to\ud 2004. The empirical approach taken is survival analysis. Such an approach\ud explicitly allows for dependency over time, in that it estimates the conditional\ud probability of merger; that is, the probability of merger by time t, given that is\ud has not occurred by time t-1. It is ideally suited to empirically examine the\ud merger timing, since it allows us to investigate whether, given that a firm has survived up to a certain point in time, changes in firm-specific characteristics or\ud changes in merger activity per se will lead to a change in the timing of a merger.\ud Findings of the macro-level provide evidence that fairly regular long waves as\ud well as a less regular, less powerful waves of mergers exist. Even though no two\ud merger waves are identical, they usually have some important features in\ud common. Their coherence with macro- and financial factors varies in strength\ud over waves of different duration and regularity. The findings at the micro-level\ud provide strong evidence of the endogenous character of mergers. A combination\ud of a range of micro-forces is the driving force within a wave which keeps the\ud bandwagon rolling at full speed. As a consequence, macro-factors may pave the\ud way for the development of initial merger activity, while micro-forces fuel\ud merger diffusion and build the dynamics within a wave.
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