Korea Capital Market Institute

The global M&A market goes through periodic booms and busts, referred to as merger waves, where M&A activities cluster around specific periods and industries. There have been six merger waves in the history of global M&As and they occurred in: the 1890s, 1920s, 1960s, 1980s, 1990s, and 2000s. From the fifth wave(1990s), the M&A boom spread to Europe and Asia. Each wave is unique in its economic, technological, regulatory, and general background. The first wave was driven by horizontal consolidation resulting in monopolies, whereas the second wave was driven by vertical integration leading to oligopolies. The third(1960s) was characterized by diversifications; the fourth(1980s) was to unwind the diversification and focus on core businesses. The two most recent waves were driven by the competition in a more globalized business environment, and the rise of private equity and some Asian countries including China. Corporate cash holdings have increased since the 1980s. This is also true for European and Asian corporations at least since the early 2000s. Such an increase in the share of cash to total assets is affected by precautionary, agency, and strategic motives behind the cash holdings. However, unlike the common observation in the press, corporate cash holdings themselves do not necessarily ignite merger waves. Rather, corporate net cash flow better predicts the timing of a merger wave. Corporate net cash flow relative to total assets shows the available resources and profitability, and it could have predicted three out of four waves since the 1950s. In the US, corporate net cash flow relative to total assets in 2010 was 6.3%, close to the historical high of 7.0% recorded in 1966, when the third wave started. In addition, credit markets are showing improvements: credit spreads are tightening and LIBOR is at a historical low. Also, corporate profitability in 2010 is near its historical high and firm valuations are slightly lower than historical averages as shown in the S&P 500 P/E ratio. All of these factors point to an imminent merger wave in a few years. Participating in the early stage of an M&A boom is more profitable than entering at a later stage. Korean firms competing in the global market are well advised to anticipate what is coming in the global M&A market and to exploit the first mover`s advantage.