M&A: Where It's Been, Where It's Going.
Over the last 15 years, M&A levels have risen, private equity has become accepted globally, and shareholders have become owners
In the late '90s, M&A was surging, and there seemed no rational reason it would slow any time soon. It's easy to forget those spring-like years of the second Bill Clinton presidential term, so different from the start of the second Barack Obama term, with its fiscal fears and deep unease. The late '90s certainly experienced economic shocks, but M&A dealmaking still seemed as inevitable as faster chips, higher markets and American-led globalization. The wild '80s, with its raiders, greenmail and junk-bond-fed circuses, had been tamed with new legal guidelines out of Delaware and a broader acceptance of some of its more aggressive innovations, such as high-yield bonds and hostile deals. Private equity had matured into an accepted part of the deal economy. Raw memories lingered - "Barbarians at the Gate" and Oliver Stone's "Wall Street" remained popular touchstones - but the arguments for an expansionary M&A regime were potent: efficiency, competitiveness, free and open markets and the preeminence of shareholder value.
In short, few people questioned M&A growth, if not necessarily year in and year out, then like a steadily rising tide, not unlike the equity markets themselves. Nearly everyone in 1997 thought there would be more M&A volume - more strategic transactions, more global deals, more private equity, more initial public offerings, more bankers and lawyers - in five years, and more yet in ten. It was difficult to imagine, short of a global meltdown, what would break its momentum. M&A was a key part of a larger expansion of finance taking place. And, despite the Asia crisis and Russian default, global meltdowns weren't in anyone's calculations.
What has that 15 years wrought? In many ways, the promise of that growth has been met. M&A levels have risen generally, with the big exception of the last four years since the 2008 crisis. (2012 is likely to be down from 2011). U.S.-style M&A has spread around the world, not only to Europe but to emerging economies as well. Private equity, despite the controversies, has become globally accepted, albeit in different varieties. Sophisticated M&A now occurs deep into the middle market - and M&A is a vehicle for integrating those companies globally. Hostile forays, not to say junk bonds, rarely raise an eyebrow. Innovations have continued to occur, but few are really disruptive or even potentially transformative. The rules of the game are widely understood. And most important of all, the notion of shareholders as owners - the bedrock governance concept that supports modern M&A - has, despite a series of tremors, remained intact, now an accepted part of corporate law and professional practice.
But it hasn't been easy. That intervening 15 years has seen two serious market breaks - one that flattened the tech industry and wreaked long-term damage to the IPO business, the other that threatened nearly everything else. M&A has been involved in these market breaks only indirectly; the euphoria that preceded these bubbles bursting drove deal values to unsustainable and, in retrospect, absurd heights, but M&A was hardly causative. M&A, both strategic and private equity-driven, survived, and believers in M&A continue to argue that it is a solution to our larger woes. But critics have re-emerged. M&A, they argue, has not produced prosperity. In some quarters, M&A is blamed for the loss of America's industrial might or for stagnation, technological or economic. Over these 15 years, investment banking clearly lost power at major Wall Street firms to traders, part of a longer evolution from traditional clients to market-centric relationships. Meanwhile, the fallout from 2008 has tied M&A ever-closer to the larger critique - exemplified by the attacks on Mitt Romney's Bain Capital from both Newt Gingrich and President Obama - of what's come to be called the "financialization" of the economy.
This is a complex argument, which has been present, in one form or the other, since the early days of the modern M&A regime, that is, the early '70s. In the last decade or so, it has erupted periodically in Europe, particularly Germany, under the banner of resisting the incursions of so-called "Anglo-Saxon capitalism." In 2005, the Germans debated the characterization of private equity as a kind of invasion of locusts. This wasn't all that different from the broader critique that goes back to the '80s in the U.S. and that resurfaced after 2008. Where does reality lie? The truth is various efforts to "prove" that robust M&A (including private equity) increases employment and growth quickly becomes an almost Talmudic argument, much of which is beside the point. In the end, it's impossible to quantify what never happened. Even if jobs rise after a buyout, how can we say that the company wouldn't have done even better without that change of ownership? (It works the other way around as well.) In the end, the argument is less financial than it is political. Besides, technical studies rarely convince the man on the street.