Defunct Deals Show Companies Want to Get Hitched or Die TryingBy
More than half a trillion dollars of deals have been pulled
Pfizer’s $160 billion takeover of Allergan was largest failure
Some records you want, others not so much. For 2016, the standout M&A statistic so far is the death of almost $570 billion in deals, the most since the nadir of the financial crisis in 2008.
The surge in the number of failures reflects not only the over-ambition of many of the deals struck in 2015, but also the harsher regulatory environment and the willingness of politicians to scuttle deals viewed as not in the national interest.
“It seems the general level of investor support for transactions encouraged companies to push closer to regulatory limits at the same time that those limits were getting tighter,” according to Peter Tague, co-head of global M&A at Citigroup Inc. “But what was really unusual about 2016 was not the number of transactions withdrawn, but the size of those transactions that got pulled.”
The largest broken agreement of the year was Pfizer Inc.’s $160 billion takeover of rival pharmaceutical company Allergan Plc, according to data compiled by Bloomberg. The deal, announced in November 2015, was controversial from the start. Pfizer, making little effort to conceal the fact, was motivated as much by using the merger to re-domicile its tax address to Ireland as it was by Allergan’s drug portfolio.
In April, the U.S government -- long critical of tax inversion deals, in which a U.S. company shifts its tax address overseas -- took the unusual step of fine-tuning the rules to target a single transaction. Pfizer and Allergan promptly abandoned their agreement.
Other mergers, such as office-supplies company Staples Inc.’s proposed $6.3 billion tie-up with Office Depot Inc. and Halliburton Co.’s $28 billion acquisition of oil-field services group Baker Hughes Inc., were scuppered by more quotidian antitrust concerns.
The perception of an emboldened regulatory response has pushed companies -- and their advisers -- to rethink their M&A strategy.
“One of the trends we are seeing is an increase in deals structured as mergers of equals,” said Anu Aiyengar, head of North American M&A at JPMorgan Chase & Co. “Despite being harder to put together, they are attractive in an environment where there is political and regulatory uncertainty because the business risk is shared by both companies.”
Still, most of the deals that died this year weren’t the victim solely of politicians or overzealous regulators. Many buyers were simply outbid or found themselves across the table from an ultimately unwilling seller, as was the case Vonovia SE’s failed tilt at rival German property company Deutsche Wohnen AG.
After a four-month takeover battle during which Deutsche Wohnen investors publicly balked at the price, Vonovia didn’t secure enough shares to go ahead with its planned 8 billion-euro ($8.3 billion) bid.
One reason for the buyer-seller disconnect in 2016 was the strength of the equity market.
“A robust M&A market for cash deals, coupled with a rising equity market, makes the deal price a moving target,” according to JPMorgan’s Aiyengar. “When the target sees the market around it rising, the M&A value expectations start going up.”
With the Dow Jones Industrial average nearing 20,000, many of the companies that spurned the affections of rivals have been vindicated.
Whatever the factors that led to the breakdown of so many deals, one group has borne a disproportionate share of the consequences. Risk arbitrage traders, who base their positions according to the likelihood of an announced deal closing, have suffered crushing losses in some of the year’s highest profile failures, such as Energy Transfer Equity LP’s aborted $38 billion takeover of oil pipeline company Williams Cos.
Looking ahead, M&A bankers expect the regulatory environment to change, if not quite ease, under President-elect Donald Trump.
“Mr. Trump’s statements to date suggest his administration may be inclined to loosen constraints on domestic transactions, while simultaneously making cross-border deals more challenging to execute,” Citigroup’s Tague said. Still, the timing and extent are uncertain.
“We expect the transactional environment to adapt gradually rather than pivot suddenly,” he said.