Rising Number of Failed Deals May Discourage M&A, Goldman Says

  • Antitrust scrutiny, inversion rules dampen deals, analysts say
  • Uncertainty of Brexit vote may also slow dealmaking activity

Mergers and acquisitions may become a less attractive option after a record number of deals failed this year, according to analysts at Goldman Sachs Group Inc.

Most at risk are so-called mega-mergers, valued at $10 billion or more, analysts led by Conor Fitzgerald said Wednesday in a note to clients. More than $370 billion worth of deals that had already been announced were canceled in the second quarter alone, according to data compiled by Bloomberg.

Antitrust scrutiny, a crackdown by the U.S. Treasury on so-called inversion deals and national security concerns are the main reasons that deals are breaking down, according to the note. One of the most high-profile transactions to unravel this year was Allergan Plc and Pfizer Inc. walking away from a $160 billion deal that would have moved the combined company’s headquarters to Ireland. On Wednesday, Energy Transfer Equity LP and Williams Cos. broke off their $33 billion agreement.

“Failed deals can have a dampening effect for consolidation,” Fitzgerald wrote in the note. “Given the time and risk that goes into announcing an M&A transaction, buyers and sellers desire a high degree of certainty that their deals will close.”

Brexit Risk

Dealmaking activity could also be slowed by the decision from U.K. voters last week to leave the European Union. Takeovers involving European companies declined this year leading up to Britain’s vote, according to data compiled by Bloomberg.

Goldman Sachs expects the slump in U.K. deals to continue as the details of Brexit are worked out. However, over time lower valuations -- spurred by the drop in the British currency since the vote -- could make acquisitions more attractive for companies based in the Eurozone, according to the note.

The threats have pushed down shares of firms that make money in part by advising on takeovers. Shares in merger advisers Evercore Partners Inc. and Lazard Ltd., the largest independent investment bank, had their worst two-day streak since at least 2008 after the Brexit vote.

Evercore, along with Moelis & Co., also led a drop among peers after the U.S. Treasury announced inversion rules. Goldman’s Fitzgerald on Wednesday lowered his outlook on M&A advisory stocks to neutral, from attractive. Analysts Monday cut earnings estimates for the biggest investment banks, which have also faced risks to trading activities.

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