Timing of Merger Activity

Mergers and Macroeconomy

Statistical relationships
Nelson (1959, 1966) Studies

Nelson R.L., Merger movements in American Industry, 1895-1956, Princeton, NJ; Princeton University Press, 1959

Nelson R.L., 1966, Business Cycle Factors in the Choice Between Internal and External Growth,” The Corporate Mergers, W.W. Alberts and J.E.Segall, eds. Chicago; University of Chicago Press, 1966.



1959 study

For the period 1897-1954 period, there were 14 cycles in general business activity and 12 merger cycles.

A definite timing relationship to the reference cycle turning points was found in 11 of 12 merger cycles.

The two reference expansions 1911-13, 1921-23 for which there was no corresponding merger expansion were either of short duration or of moderate amplitude. The reference cycle contraction of 1953-54 had no corresponding merger contraction and was one of the mildest contractions in the six-decade period.

The peaks of merger cycle usually preceded the peaks of the reference cycle.

Hoewver, th time sequence for troughs was less consistent than for peaks. Nelson (1959. p.112) suggests that this irregular time sequence of merger activity indicates ‘ that economic forces in a depression are likely to be diffuse and weak, compelling no great uniformity in the response of merger activity

Study of relation between merger activity nad other economic series revealed that merger activity was closely related to stock trading, stock prices and business incorporations.

The peak in merger activity wsa reached one month earlier than stock prices, but its trough lagged the trough in stock prices by three months.

Analysis based on detrended series showed that mergers were more positively correlated to stock pirce changes than to changes in industrial production in periods of high merger activity.

Mergers were more positively correlated to industrial production in periods of low merger activity.

In a follow-up study, Nelson(1966) found that merger activity for the 1919-1961 period peaked on average five months before the peak in stock prices, whereas peaks in plant construction contracts and equipment orders were almost coincident with those in stock prices. Nelson's interpretation for this result was that external growth through mergers was selected by firms early in a stock price rise and before they undertook internal investments. One of the reasons offered by Nelson is that the phenomenon reflects the immediacy with which mergers start to produce revenues and profits. Internal investments may involve a protracted waiting period.

In the same study it was found that a peak in merger activity on an average, came 19 months following the trough in the reference cycle or at about the two thirds point in a reference cycle expansion lasting about 29 months.


Melicher, Ledolter, and D’Antonio (1983 Study) on the relationship between merger activity and macroeconomic variables – Industrial activity, Business failures, Stock prices, and Interest rates

Melicher, Ledolter, and D’Antonio, “A Time Series Analysis of Aggregate Merger Activity,” The Review of Economics and Statistics, 65, August 1983, pp. 423-430.


They used FTC quarterly merger data for 1947 through 1977.
Each times series was transformed into white noise ( that is, uncorrelated random variables or residuals from univariate time series models).

From these prewhitened series correlations were determined to find out lead and lag structures.

Among their findings are:

1. An increase in stock prices followed in a quarter by an increase in merger activity. Since merger negotiations begin on average about two quarters before consummation, merger negotiations may precede stock price movements by about one quarter.

2. Mergers respond inversely to prior changes in bond yields, although this relationship is weaker than the case of mergers and stock prices. Further an increase in bond yields decreases stock prices in the same period. An increase in stock prices leads to an increase in bond yields in the following period.
3. Changes in merger activity and changes in stock prices both lead changes in industrial production.
4. Merger activity precedes business failures by one quarter and the relationship is negative.

Linkages between mergers and macroeconomy have also been studied by Becketti (1986)

Becketti, S., “corporate Mergers and the Business Cycle,” Economic Review, Federal Reserve Bank of Kansas City, May 1986, pp. 13-26


Golbe and White (1987) is another study that examined determinants of merger activity.

Golbe, Devra L., and Lawrence J White, “A time series analysis of mergers and acquisitions in the U S Economy,” mimeo, Presented at the NBER Conference on Mergers and Acquisitions , February 1987.