Robust merger and acquisition (M&A) activity has accompanied the bull market, but rising uncertainties, including the protracted U.S.-China trade war, are prompting corporate executives to delay making new deals. In 3Q 2019, versus the same period in 2018, the value of deals fell by 16% worldwide and by 40% in the U.S., per financial data provider Refinitiv. The total dollar values for the quarter were the lowest since 2016 globally and the lowest since 2014 in the U.S..
“The cross-currents of nationalization versus globalization and trade, combined with the difficult-to-predict nature of antitrust enforcement in the U.S., definitely make it a difficult regulatory environment to navigate," as Navid Mahmoodzadegan, co-president of investment banking firm Moelis & Co., warned earlier this summer, in remarks to Bloomberg. “The combination of deals getting blocked and held up has a chilling effect on other deals that we don’t read about because they never happen,” he added.
Significance for Investors
In 3Q 2019, total global M&A deals were valued at $749 billion, consisting of $246 billion in the U.S., $249 billion in Europe, $160 billion in Asia, and $94 billion in the rest of the world. Asian deals were down by 20% year-over-year, and at their lowest level since 2017, partly due to political unrest in Hong Kong. Europe bucked the global trend, recording 45% greater deal volume than a year ago.
Among the big deals recently cancelled was a proposed $200 billion recombination of tobacco giants Altria Group Inc. (MO) and Philip Morris International Inc. (PM). While some analysts liked the idea, investors generally did not, Barron's reports. Shares of both companies rose after the deal fell through last week.
“M&A activity is being held back by regulatory complexity and uncertainty,” as Robert Kindler, global head of mergers and acquisitions at Morgan Stanley, observed to Bloomberg in June. “We have an administration that has a heightened focus on foreign investment and the national security implications of deals and that’s caused other countries to reciprocate. It’s fair to say it’s far more challenging than before,” he elaborated.
But even proposed deals between U.S. companies have been opposed by the Trump administration. The $84.5 billion merger between AT&T Inc. (T) and Time Warner Inc. was criticized by Trump while he was a candidate in 2016. After a 15-month effort by the U.S. Department of Justice to block the deal on grounds that it would increase consumer prices, a three-judge panel ruled in February that the government's case was "unpersuasive," and the merger subsequently took place, as reported by Reuters.
A $26 billion merger between mobile phone service providers T-Mobile US (TMUS) and Sprint Corp. (S) has been met with multiple delays since being announced in April 2018. The FCC and various state regulators are among those still raising objections.
Both merger candidates and private equity firms are “taking a ‘wait and see’ approach to political machinations before committing to deals again,” writes law firm CMS, as quoted in a recent Bloomberg article. “Dealmakers are setting the bar high and only moving for the highest quality assets,” they added.
CMS continued: “Rising protectionism and escalating tariff spats between the major economies of Europe, the U.S. and China have taken cross-border deals off the table for many. A growing number of broken deals have also made senior management hyper alert for fear of repeating the failed transactions of colleagues and rivals.”