Question

Explain the generalized business merger period in the United States. What happened to the structure of the American industry during the first merger period?

Answer 1

A merger is the combination into a single business enterprise of two or more previously independent enterprises. The combination may take a number of forms. Among these are the outright purchase of the assets of one company by another for cash or for the stock or debt of the acquiring company. A holding company may be created, with the stock of the combining companies exchanged for that of the parent company. The stock of the merging companies may be held in trust, though this has been generally superseded by corporate arrangements. Combinations have been effected by long-term lease. The legal and financial forms the merger takes are governed largely by tax, corporate charter, and other legal provisions that introduce unique elements in each case. While such factors are of some influence in shaping the broad pattern of mergers, they are probably much less important than underlying forces of economic change and competition.

United States is the highly episodic nature of their occurrence. In three periods1898 through 1902, 1926 through 1930, and 1957 through 1961 industrial mergers occurred on so extensive a scale that they are best described as waves or movements. This tendency of a fundamental form of enterprise expansion to show vast and widely separated peaks of activity has probably interested students more than the examination of individual mergers.

The first recorded merger movement of major proportions occurred as the United States entered the twentieth century, its peak years being 1898 through 1902. For a number of industries it represented the formal consolidation of companies that had already achieved a certain degree of policy coordination through agreements to avoid active competition, agreements that had shown distressing tendencies to break down. For a few important companies it represented merely a change in legal form, from trust to holding company, of an earlier merger. Most importantly, however, it involved the consolidation of companies in a large number of previously dispersed industries into single companies in which control was tightly centralized. It transformed many industries formerly characterized by many small and medium-size firms into those in which one or a few large corporations occupied dominant positions. During the first merger wave such industrial giants as U.S. Steel, American Tobacco, International Harvester, DuPont, Anaconda Copper, Corn Products, American Smelting and Refining, Otis Elevator, Allis-Chalmers, and American Sugar Refining were created.

The second large movement took place in the last half of the 1920s, its peak years being 1926 through 1930. To some degree it represented consolidation in the important new industries that had appeared since the first merger wave. It also reflected attempts in some industries to restore the levels of concentration achieved three decades earlier by firms whose leading positions had been eroded in the meantime. Among the prominent companies created by merger in this period were National Steel, National Dairy Products, United Aircraft, Owens-Illinois, and Caterpillar Tractor.

As Figure 1 indicates, the third large movement was probably underway in the early 1960s. There was a short merger revival immediately following World War II, which was confined mainly to the two years 1946 and 1947. However, merger activity did not return to sustained high levels until the mid-1950s. The pattern of recent mergers has been more varied, with product diversification and tax minimization playing a more prominent role than in the earlier movements.

The current revival of merger activity, while large, is not as large as the earlier merger movements. In the five turn-of-the-century years, 1898 through 1902, at least 2,700 firms disappeared into the manufacturing and mining mergers reported in the financial press and reporting was not as comprehensive as it has since become. In the peak years of the late 1920s, 1926 through 1930, mergers claimed 4,800 firms. By contrast, in the five years 1957 through 1961 there were about 2,900 disappearances. Since the number as well as the size of industrial firms has grown considerably in the past six decades, the most recent levels of merger activity are relatively lower than suggested by the absolute comparisons.

During the first merger period American Indusrtries become larger due to the compination of multiple companies.

• The first merger wave followed the Depression of 1883.
  About two thirds of all merger activity during the first merger wave was concentrated in a handful of industries: petroleum products, mining, metals, food products, and transportation.
• The first merger wave included many horizontal mergers, so the affected industries became highly concentrated. For example, during this period J.P. Morgan merged U.S. Steel with Carnegie Steel and more than 700 small steel firms. The resulting mega-steel company controlled 70~80% of the steel production in the United States.
• The monopolies created during the first merger wave spurred a backlash. The Justice Department charged a number of the large monopolies with violating the Sherman Antitrust Act (1890). President Theodore Roosevelt (1901-1907), became known as a trust buster. He began aggressively pursuing the trusts while in office. His successor, William Howard Taft, also enforced the Sherman Antitrust Act vigorously.