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The Art of Capital Restructuring: Creating Shareholder Value through Mergers and Acquisitions by H. Kent Baker, Halil Kiymaz

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CHAPTER 2

Merger Waves

JARRAD HARFORD

Marion Ingersoll Professor of Finance, University of Washington

INTRODUCTION

The goal of this chapter is to provide a survey and synthesis of the literature on merger waves. Given the sheer volume of research on the subject of mergers, the chapter cannot discuss all the facets of this important topic. Thus, the chapter includes only some of the more important research on merger waves.

The chapter begins by discussing the motives for combining previously independent assets and then attempts to explain the clustering of such activity. While merger activity is motivated by a variety of factors, understanding what causes merger activity to cluster is critical. Because this clustered merger activity inside waves represents such a high proportion of all activity, understanding the drivers of clustering leads to an understanding of the main drivers of mergers.

MERGER MOTIVES

Many theories have been put forth to explain mergers. Some are rooted in the theory of the firm. Determining the right combination of jointly managed assets is clearly related to the question of the boundary between the firm and the marketplace as posited in Coase (1937), Alchian and Demsetz (1972), and others. A related strand of literature builds on Jensen and Meckling's (1976) discussion of the agency conflict between a corporation's managers and owners. Jensen (1986) lays out a theory where the agency conflict, aided by an abundance of free cash flows, results in value-destroying ...

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