A Financial Perspective on Mergers and Acquisitions and the Economy
The Free Cash Flow Theory of Takeovers: A Financial Perspective on Mergers and Acquisitions and the Economy
Michael C. Jensen
Harvard Business School MJensen@hbs.edu
© Michael C. Jensen, 1987
“The Merger Boom”, Proceedings of a Conference sponsored by Federal Reserve Bank of Boston, Oct. 1987, pp.102-143
This document is available on the Social Science Research Network (SSRN) Electronic Library at: http://papers.ssrn.com/ABSTRACT=350422
The Free Cash Flow Theory of Takeovers: A Financial Perspective on Mergers and Acquisitions and the Economy
Michael C. Jensen*
Harvard Business School MJensen@hbs.edu From, “The Merger Boom”, Proceedings of a Conference sponsored by Federal Reserve Bank of Boston, Oct. 1987, pp.102-143
Economic analysis and evidence indicate the market for corporate control is benefiting shareholders, society, and the corporate form of organization. The value of transactions in this market ran at a record rate of about $180 billion per year in 1985 and 1986—47 percent above the 1981 record of $122 billion. The number of transactions with purchase prices exceeding one billion dollars was 27 of 3300 deals in 1986 and 36 of 3000 deals in 1985 (Grimm, 1985). There were only seven billion-dollar plus deals in total, prior to 1980. In addition to these takeovers, mergers, and leveraged buyouts, there were numerous corporate restructurings involving divestitures, spinoffs, and large stock repurchases for cash and debt. The gains to shareholders from these transactions have been huge. The gains to selling-firm shareholders from mergers and acquisition activity in the period 1977-86 total $346 billion (in 1986 dollars).1 The gains to buying-firm shareholders are harder
Estimated from data in Grimm (1986). Grimm provides total dollar values for all merger and acquisition deals for which there are publicly announced prices amounting to at least $500,000 or 10 percent of the firm and in which at least one of the firms was a U.S.
Michael C. Jensen
Harvard Business School MJensen@hbs.edu
© Michael C. Jensen, 1987
“The Merger Boom”, Proceedings of a Conference sponsored by Federal Reserve Bank of Boston, Oct. 1987, pp.102-143
This document is available on the Social Science Research Network (SSRN) Electronic Library at: http://papers.ssrn.com/ABSTRACT=350422
The Free Cash Flow Theory of Takeovers: A Financial Perspective on Mergers and Acquisitions and the Economy
Michael C. Jensen*
Harvard Business School MJensen@hbs.edu From, “The Merger Boom”, Proceedings of a Conference sponsored by Federal Reserve Bank of Boston, Oct. 1987, pp.102-143
Economic analysis and evidence indicate the market for corporate control is benefiting shareholders, society, and the corporate form of organization. The value of transactions in this market ran at a record rate of about $180 billion per year in 1985 and 1986—47 percent above the 1981 record of $122 billion. The number of transactions with purchase prices exceeding one billion dollars was 27 of 3300 deals in 1986 and 36 of 3000 deals in 1985 (Grimm, 1985). There were only seven billion-dollar plus deals in total, prior to 1980. In addition to these takeovers, mergers, and leveraged buyouts, there were numerous corporate restructurings involving divestitures, spinoffs, and large stock repurchases for cash and debt. The gains to shareholders from these transactions have been huge. The gains to selling-firm shareholders from mergers and acquisition activity in the period 1977-86 total $346 billion (in 1986 dollars).1 The gains to buying-firm shareholders are harder
Estimated from data in Grimm (1986). Grimm provides total dollar values for all merger and acquisition deals for which there are publicly announced prices amounting to at least $500,000 or 10 percent of the firm and in which at least one of the firms was a U.S.