Photographer: Michael Nagle/Bloomberg

Wall Street Dealmaking Goes From Boom to Bust in Few Months

  • The value of canceled deals soar as regulators get tough
  • Companies have pushed the envelope in deal size, analyst says

Wall Street bankers celebrated last year as mergers and acquisitions reached the highest level ever, topping even pre-crash 2007. This year M&A is hitting a more dubious record: Deals gone bust.

Of the $5 trillion in transactions that were announced in 2015, almost 10 percent -- $504 billion -- have since been terminated. Wednesday was especially bad for bankers as two mergers valued at a combined $21 billion collapsed.

The latest cancelled deals mean 2015 has been stripped of its title as the biggest year for dealmaking, dropping to $4.06 trillion compared with 2007’s $4.09 trillion.

The companies and their bankers can blame themselves for some of the failures, said Ira Gorsky, an analyst with Jersey City, New Jersey-based Elevation LLC. Deals have grown so large, and in already consolidated industries, as to provoke the wrath of aggressive antitrust enforcers.

“Companies have really pushed the envelope in terms of the size of deals being attempted,” Gorsky said.

That was the case with the end of Staples Inc.’s attempt to buy Office Depot Inc. for $6.3 billion. The FTC had argued that uniting the office suppliers would harm buyers, and a federal judge agreed in a filing Tuesday. The companies said they would terminate their agreement.

Hours later, the European Union blocked CK Hutchison Holdings Ltd.’s 10.25 billion pound ($14.8 billion) bid to buy Telefonica SA’s O2 unit. Regulators cited the merger’s potential to hinder competition and drive up prices.

The blocking of the Staples-Office Depot transaction “is a reminder that even the current political and regulatory environment can present challenges for deal makers,” said Eric Shube, a New York-based corporate partner at law firm Allen & Overy.

Mega-Deals

In 2015, there were more so-called mega-deals, those valued at $20 billion or above, than ever. In all, there were 17 deals at or above that value compared with 35 such deals in the five years from 2010 through 2014. Such was the boom in large deals that the average size of all M&A valued at $500 million or above was $3.3 billion, up from $2.2 billion in 2014.

As big deals have been terminated, bankers working on the transactions have watched billions of dollars in potential fees evaporate. Had all the withdrawn deals announced in 2015 made it to closing, advisory fees would have totaled about $4 billion to $4.5 billion globally, according to estimates from consultants Freeman & Co.

In the U.S. alone, fees would have been worth about $1.5 billion to $2 billion.

Size isn’t the only factor drawing scrutiny. Antitrust enforcers at the Justice Department in April frustrated Canadian Pacific Railway Ltd.’s bid to buy Norfolk Southern Corp., opposing a voting trust structure that called for Canadian Pacific’s chief executive to run Norfolk Southern.

The challenge came days after the government sued to stop Halliburton Co.’s takeover of Baker Hughes Inc., which had been languishing for about a year and a half. The companies failed to overcome concerns that the deal would reduce choice in oilfield services, running a risk of higher oil and gas prices for consumers.

The Treasury, too, has been aggressive in its efforts to scuttle deals it sees as opposing the national interest. Officials torpedoed the $160 billion merger of Pfizer Inc. and Allergan Plc by proposing the tightening of regulations to crack down on corporate tax inversions -- deals which allow a U.S. company to shift its tax address offshore.

Still, some dealmakers are optimistic for the rest of 2016. “The transaction pipeline remains robust and the equity markets have recovered significantly from the sell off early in the year, further supporting deal activity,” Allen & Overy’s Shube said.

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