March 27, 2018

Breakingviews: Market jitters accentuate M&A regulatory risk

by Breakingviews.

Market swoons are bad news for dealmakers. Stock-market plunges can erode the value of bids involving acquirers’ stock, make bankers reluctant to lend, and change the outlook violently. Recent market tumult, with the S&P 500 Index down 6 percent last week, doesn’t qualify as an extinction event – at least not yet. It does, however, make it harder to overlook regulatory dangers attached to certain possible deals, like the combinations of CVS Health and Aetna and AT&T and Time Warner.

Last year was the fourth in a row with over $1 trillion of announced transactions involving U.S. companies worth over $1 billion, according to our data. The only other periods breaking that threshold over the past two decades were 1999-2000 and 2006-2007.

Market watchers know those booms turned to bust, with M&A volume falling by more than half in the following two years. Corporate executives turned from aggressive expansion to shoring up balance sheets, while lenders battened down the hatches. That may eventually happen this time around, too, undermining bids like AT&T’s $85 billion deal for Time Warner. In the meantime, there’s another history lesson.

When M&A booms age, the deals become both larger and riskier. Company leaders challenge antitrust authorities and try and force rivals’ hands. Some of the biggest deals that fail are struck near market peaks. For example, regulators killed MCI WorldCom’s $115 billion attempt to buy Sprint in 2000, and helped doom BHP Billiton’s $148 billion hostile offer for Rio Tinto in 2008.

This isn’t just ancient history, either. Broadcom ignored regulatory risks to push its $117 billion hostile bid for Qualcomm, only to see President Donald Trump block the deal earlier this month on national-security grounds.

Two of today’s biggest examples look dicey. CVS’s $69 billion offer for Aetna is facing a second round of information-gathering by the Department of Justice. And the U.S. authorities are opposing AT&T’s purchase of Time Warner.

Shares have wobbled in recent days, but more significantly the gaps between what these buyers are offering and the targets’ stock prices have widened. AT&T’s offer is now more than 10 percent above where Time Warner is trading, and Express Scripts would have to surge over 25 percent to reach the price Cigna agreed to pay in a deal worth over $50 billion. These deals increasingly look like dinosaurs.

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