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2016 Is Turning Into a Record Year for Broken Deals in Global M&A

June 30, 2016, 8:56 AM UTC
Pfizer Inc. Headquarters As They Agree To Combine With Allergan Plc In $160 Billion Deal
Photograph by Bloomberg — Getty Images

The value of announced mergers and acquisitions (M&A) worldwide dropped by a third in the second quarter of 2016, as a wave of transactions were abandoned in the wake of concerns over regulatory and tax risks or national security.

While 2015 was a record year for M&A, 2016 is shaping up to be a record year for ‘broken’ deals, as the United States flexes its antitrust muscle and seeks to crack down on deals that aid tax avoidance or risk harming national security.

Such upsets have caused company executives to think twice before contemplating complex deals that could attract government scrutiny.

Coupled with market volatility triggered by Britain’s vote to leave the European Union last week, this has dented some of the confidence required by corporate boards to approve deals.

“This year companies have been reluctant to take on meaningful regulatory or tax risk or to pursue unsolicited transactions to the same extent that many companies did last year. The fact that a number of those deals were not ultimately successful has undoubtedly had an impact,” said Gary Posternack, global head of M&A at Barclays.

Last year’s biggest deal, U.S. drug maker Pfizer’s (PFE) $160 billion agreement to acquire Dublin-based Botox maker Allergan (AGN), was abandoned last April after the U.S. Treasury introduced new rules to curb so-called inversions that are used by companies to lower their bills by redomiciling overseas.

U.S. oilfield services providers Halliburton (HAL) and Baker Hughes (BHI) last month terminated their $38 billion merger deal after opposition from U.S. and European antitrust regulators.

In February, Koninklijke Philips NV (PHGFF) canceled a planned $2.8 billion sale of its lighting-components unit to a consortium led by China’s GO Scale Capital after the Committee on Foreign Investment in the United States, which scrutinizes deals on national security grounds, objected.

Such moves affected new dealmaking.

Announced global M&A deals reached a value of $839 billion in the second quarter, down 32.5% from a year ago but up 14.2% from the first quarter of 2016, according to preliminary Thomson Reuters data.

The second quarter’s biggest deal was German chemicals and life sciences company Bayer’s (BAYRY) $62 billion offer for U.S. seeds company Monsanto (MON). The two companies have yet to successfully negotiate a deal.

Other deals this quarter included Abbott Laboratories’ (ABT) $30.5 billion takeover of U.S. medical products maker St Jude Medical (STJ) and Microsoft’s (MSFT) $26.2 billion agreement to acquire U.S. professional social media platform LinkedIn (LNKD).

Weighing on M&A has been the recent negative reaction that acquirers have seen in their stock price following a deal announcement. This may be partly due to companies paying more on average to buy companies this year than they did last year.

After declining to 25% in 2015, their lowest level since 2006, bid premiums increased to 34% this year, modestly above the long-term average of 33%, according to a research note this week by Goldman Sachs Group analysts.

“It’s too premature to say if the Brexit decision will cause any slowdown in global M&A activity. The key drivers of a healthy dealmaking environment remain: the need to supplement limited organic growth with M&A, the opportunity to improve margins by realizing synergies, and the availability of low-cost capital to finance acquisitions,” said Matt McClure, Goldman’s co-head of M&A in the Americas.


Brexit Jitters

Dealmaking in Britain, which accounts for 7.0% of global M&A volume, has suffered, with M&A announcements down 85% year-on-year in the second quarter.

“Brexit is likely to have an impact on M&A going forward. It has increased market volatility and negatively impacted the global economic outlook. Ongoing uncertainty will inevitably lead to a more cautious approach to M&A for the rest of the year,” said Adrian Mee, Bank of America Corp’s co-head of global M&A.

European M&A deals were down 41% in the second quarter to $147.3 billion. The United States, the world’s biggest M&A market, was also down 23% to $421.8 billion.

“While recent volatility, headline-induced uncertainty and macro headwinds may create a challenging environment for global deal flow, we expect U.S. focused M&A to remain relatively strong,” said Vito Sperduto, head of U.S. M&A at RBC Capital Markets.

Chinese companies have continued to be a major driver of dealmaking activity. China outbound cross-border M&A totaled $121.1 billion so far this year, already surpassing the full year record of $111.5 billion set last year.