Breakingviews: Regulatory bottleneck is new M&A hazard

Dealmaking is rarely simple, but there’s a new bottleneck. An understaffed U.S. Federal Trade Commission is taking a longer and harder look at deals even as merger activity surges. If the regulator doesn’t speed up, the future probably holds higher break fees and fewer successful tie-ups.

Nearly $2 trillion of mergers have been announced in the United States in the year to date, the most on record, according to Refinitiv. Meanwhile, the FTC is doing more with less. The regulator, which overviews pharmaceutical mergers like Merck’s $11.5 billion deal for Acceleron Pharma announced on Thursday, has been slowly bleeding employees in recent years and has a third fewer staff than it did in 1979. Yet the number of deals is rising: 369 deals fell under review requirements in August, twice as many as the same month last year. Moreover, FTC Chair Lina Khan has made it clear enforcement has been too lax, so even small deals are getting more scrutiny.

The result has been a snarling up of the process. Initial assessments normally take 30 days, but the watchdog has told some parties it couldn’t meet this time frame. And it has said that companies that proceeded before deals were fully investigated did so at their own risk.

Companies therefore face the unsavory choice of delaying closure or risking subsequent legal challenges. Some will proceed, like biotechnology firm Illumina, which completed a $7 billion deal in August prior to approval. The risk is the FTC will sue to unwind more deals like it did last year with Altria’s $12.8 billion investment in e-cigarette maker Juul.

Unless the FTC picks up pace, there will be problems. No acquired business likes to be left hanging, as customers and employees may jump ship in the meantime. A higher price and bigger break fees can compensate somewhat for the risk of a degraded business should a deal fall apart. Merck agreed to pay a higher break fee if the deal were terminated after an extension.

But potential buyers may stay away if they face regulatory delays. Price and speed are key determinants of whether M&A is successful. If targets are demanding higher prices and integration takes longer, more purchases may turn out to be lemons.

Lengthier delays also may mean more companies are left at the altar as parties have longer to rethink and the world around them changes. Even if the boom in deals continues, fewer of these alliances may end as happy marriages.

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