Legislation vs Takeover Activities in USA and Australia

Changes in legislation and other policies often have significant impact on the level of M&A activity within US and Australia. In US market, takeovers activities in the 1980s were characterized by heavy use of leverage; LBO's and debt-financed takeovers may have been driven by artificially cheap funding from the junk bonds market. Firms purchased other firms in leveraged takeovers by borrowing rather than by issuing new stock or using solely cash on hand. Other firms restructured themselves, borrowing to repurchase their own shares.

But, at the end of 1980's, there was a decreasing in mergers and acquisitions.

It is because the recession and collapse of the junk bond market. So, the firms weren't having enough of funding to takeover the other companies. However the growing of LBO activity in Australia has been much less dramatic because there was hardly a corporate bond market in Australia for investment grade bonds, let alone a junk bond market, there is also the introduction of the imputation system lessened the tax advantages of highly-leveraged transactions, there was also the opportunity to observe the problems that some LBOs were experience in the US (Brealey, Myers, Partington, Robinson, 2001, p 1017)

During the 1980s, antitrust enforcement lessened, resulting in more and larger horizontal mergers (acquisitions of target firms in the same line of business).

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In addition, investment bankers became more open to the kinds of mergers they tried to facilitate; as a result, hostile takeovers increased to unprecedented numbers. In the US, the Tax Act of 1982 encouraged corporations to the M;A activities as they can utilise the tax saving from the tax shields.

That the acquisitions may have been the most attractive means for securing tax benefits (that acquisitions typically increase a firm's depreciable asset allowances. Increased depreciation produces lower taxable income, thereby providing an additional incentive for acquisitions). However, under the 1986 tax reform Act, the top individual ordinary income tax rate was reduced from 50 to 28 percent, and the special capital-gains tax was also changed, treating capital gains as ordinary income.

The 1986 Tax Reform Act diminished some of the corporate tax advantages of merger and acquisition. Tax reform has effect on shareholders behaviour that stop encouraging firms to retain funds for purposes of diversification or merger and acquisition that reduce the highly number of M&A activities. The other factors that also effect on waves of merger and acquisition in US market that a number of industries have experience increased takeover activities due to industry specific deregulation activity, including banking, telecommunications, oil and gas and electric utilities.

While in Australia the Trade Practices Act and the Foreign Acquisition and Takeover Act, which restricts takeovers in particular industries, such as Broadcasting, Banking, and insurance. The waves of Merger and Acquisition which started in 1995 and which still lasts can be characterized by the catch-words globalization and deregulation. Globalization leads to an extension of markets and firm sizes tend to follow this trend.

Deregulation opens up former national monopolies for international competitors, and there are rich opportunities to penetrate foreign markets by cross-border mergers and acquisitions. The antitrust policy result of this wave is the intense debate about global competition rules. The most active industries in the current merger wave are those where globalized markets are of particular importance (for instance in the motor car or pharmaceutical industry), and in those industries where deregulation and liberalization significantly changed competition intensity (especially telecommunications and utilities).

Australia has more efficient corporate control as evidenced in the CLERP reform whose objective is "to ensure that business regulation is consistent with promoting a strong and vibrant economy and provides a framework which assists business in adapting to change". That also encourages the M&A activities due to the incensement of completion within Australia market as well as in Globalisation.