The Scope of the Phenomenon

Mergers and acquisitions are among the most exciting areas in the world of corporate finance. After the wave of acquisitions of the 1980s subsided, Wall Street experienced another M&A period in the mid-1990s. This wave emphasized strategic mergers and acquisitions, as opposed to the late 1980s' wave, which was characterized mainly by leveraged buy-outs (i.e., acquisitions financed with high-yield debt) by financial players.

In recent years, we have witnessed a wave of extremely large mergers and acquisitions; when such deals concerned the mergers and acquisitions of young high-tech companies, their dollar values were even higher than the amounts raised by such companies in stock exchanges. For instance, the total value of mergers and acquisitions which took place in the United States in 2000 exceeded $1.6 trillion as opposed to equity offerings of only $110 billion, as reported by the law firm Hale and Dorr. Approximately 9,500 mergers were announced, as compared with around 300 IPOs. The technology sector constitutes a principal component of this field, with around 2,500 deals executed in the computer software, supplies, and services industry. However, it is important to note that of this considerable number of deals, the largest 200 accounted for more than $1 trillion, the biggest of all being the merger of AOL and Time Warner (a merger worth $160 billion), which was approved by the authorities only in 2001.

Mergers and acquisitions are performed with compositions of various forms of payments. While most transactions are cash deals or include a cash component, the majority of the deals, from the point of view of financial volume, are either stock deals or stock and cash combination deals. For instance, in 2000 approximately 1,500 deals were made in cash in the amount of around $340 billion, as compared with around 1,400 stock-for-stock deals in the amount of approximately $750 billion; deals made with a combination of equity, debt, and cash accounted for another $230 billion.

Whereas an IPO used to be the main exit for investors in startups, in recent years the phenomenon of the acquisition of startups by large companies in early stages, often even before the development of the product is finished, has become increasingly widespread.

Starting in the second half of 2000, the scope of M&A activity related to startups had significantly slowed down, similar to the patterns observed in the IPO market. In addition, many of the transactions of recent years were written-down by the acquiring companies, in a combination of admitting over-priced transactions, and newly launched accounting rule which specifically requires the re-valuation of the price above tangible assets value paid in acquisitions (goodwill).