What Is Merger Mania?

Merger mania is a catch-all phrase used to describe bouts of frenzied deal-making activity, often at the top of the merger and acquisition (M&A) cycle. It is associated with companies paying crazy prices, financed by excessive levels of debt, in a desperate attempt to quickly boost revenues and profits.

Key Takeaways

  • Merger mania is a catch-all phrase used to describe bouts of frenzied debt-quelled M&A activity.
  • Every now and then, deal-making becomes aggressive in one fashionable industry, or the whole market, and valuations lose touch with reality. 
  • Most M&A deals fail to live up to their potential and aggressively overpaying for assets only increases this risk of failure.

Understanding Merger Mania

Companies may be tempted to buy or join forces with other businesses for a variety of reasons. Potential benefits include economies of scale, diversification, expanding into new territories, boosting market share, increased synergy, cost reductions, gaining new technology, and reducing excess capacity and competition in the marketplace.

Every now and then, these advantages can lead M&A activity to spiral out of control. When companies find themselves with bucketloads of cash parked in low-interest accounts and instruments, and few opportunities to generate decent returns by investing internally in the business, they often turn to M&A as a way to make their money work harder. Companies desperate for a quick fix to grow in size and leapfrog rivals will also throw their hat into the ring, resulting in a surge of buyers in the market and a clear case of merger mania.

Merger mania mainly refers to periods when deal-making becomes aggressive in one fashionable industry, or the whole market, and valuations lose touch with reality. In other words, deals are made that destroy more shareholder value than they create.

Most M&A deals fail to live up to their potential. Aggressively overpaying for assets only increases this risk of failure.

The term merger mania was coined in the 1980s leveraged buyout and junk bond boom by one of the most notorious corporate raiders of all time, Ivan Boesky. 

History of Merger Mania

There have been several famous M&A booms on Wall Street. Historically, merger mania has been associated with executive vanity and empire building. During the merger wave of the mid-1950s to 1969, the "go-go years," conglomerate mergers exploded. From 1965 to 1975, 80% of all mergers were conglomerate mergers.

Over the years, increased M&A activity has frequently been concentrated in particular sectors. The boom in the late 1990s was a period of technology-driven merger mania, with tech and telecoms companies in the dotcom bubble accounting for a significant portion of deal-making activity. 

Then after 2000, and before the financial crisis, there was a rush into emerging markets and commodities, and a stampede into private equity buyouts. Many chain retailers, which were bought by private equity firms during this time of heady retail optimism, fell victim to the retail apocalypse because they were loaded up with unsustainable levels of debt.

In more recent years, specifically the period following the great recession of the late 2000s, a climate of easy money and desire to augment product development led activity to spike in the U.S. healthcare, media, and tech sectors. In 2019, average purchase price multiples for buyouts rose to historic highs in the U.S., with valuations having recovered to levels seen at the peak of the last two global M&A booms, in 1996 and 2007.

Special Considerations

Today, mergers are meant to be driven by more strategic and economic rationales, as seen in the trend for spinoffs and cross-border mergers. That said, wise investors should always be skeptical of M&A activity and constantly be on the lookout for the symptoms of merger mania.

A study by the Havard Business Review suggests the failure rate of M&A stands somewhere between 70% and 90%. Poor integration and overpaying, core characteristics of merger mania, were identified as the two main culprits.