Leveraged Buyout Activity in the U.S. Economy

During the 1980s, corporate mergers and acquisitions assumed historically high levels of activity in the American economy.1 Earlier major episodes of merger and acquisition activity in the American economy (particularly those in the 1960s) were primarily motivated by corporate diversification strategies, in which the principal goal was growth.2 By contrast, the unfriendly takeover (wherein the strategic goal often had little relevance to the primary business activity of the acquiring corporation) characterized much of the merger and acquisition activity of the 1980s.3

Further, an increasing proportion of the acquisition and merger activity in the late1980s was of the LBO variety. An

1P. F. Drucker, "The Problem of Corporate Takeovers: What Is to Be Done?" The Public Interest (Winter 1986): 17.

2W. F. Glueck, Business Policy and Strategic Management, 5th ed. (New York: McGrawHill Book Company, 1989), 274.

1 2LBO is one in which the cost of the purchase is largely borne by the firm being acquired. In most instances, these deals are structured to be financed by socalled junk bonds. Junk bond is the term used to describe an (1) original issue, (2) highyield, (3) lowgrade, (4) corporate bond.4 In the context of high and lowgrade, thi

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rmance, the findings reported in the literature with respect to diversified __________ 17Chatterjeu, 119. 18Ibid., 130. 19B. E. Eckbo, "Horizontal Mergers, Collusion, and Stockholder Wealth," Journal of Financial Economics, 11 (1983): 269, 272. 20Ibid., 269. 21Ibid. 7and nondiversified firms are mixed. Generally, over the longterm, there were no significant differences found between diversified and nondiversified firms with respect to proportional profitability levels or with respect to risk levels.22 Conversely, it was found that diversified firms did achieve greater rates of growth than did nondiversified firms.23 A conflicting finding was that, among diversified firms, those with greater diversification were more profitable than were those with less diversification.24 On the face of these findings, there appears to be a conflict between the finding that greater diversification leads to greater profitability, while diversification per se does not lead to greater profitability than does nondiversification. One possible explanation for these conflicting findings is that poorly designed and executed mergers lead to substandard financial performance in comparison to nondiversified firms, while well de
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Approximate Pages = 14 (250 words per page)

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