Big mergers are getting tougher to pull off
If Wall Street hates uncertainty, then it despises regulatory uncertainty. Analysts and money managers loathe it when the unpredictable nature of politics and regulations upsets their investment-making decisions. However, when it comes to mergers and acquisitions, they can't ignore the issue any longer, given recent actions by government agencies that have already scuttled one high-profile deal and threatens others.
Pfizer's (PFE) $160 billion acquisition of Ireland-based Allergan (AGN) was called off this week after the U.S. Treasury Department announced plans to make tax-lowering inversion deals like that one less profitable. Pfizer had planned to relocate in Ireland after the merger to take advantage of Ireland's lower corporate tax rate.
On Wednesday, the U.S. Department of Justice filed a challenge to Halliburton's (HAL) $35 billion acquisition of rival oil-field services provider Baker Hughes (BH). And last month, Justice filed suit to block Tribune Publishing's (TPUB) purchase of two Southern California newspapers that operate near its Los Angeles Times property.
Both Baker Hughes and Tribune have vowed to fight the government's efforts, while executives from Pfizer and Allergan have denounced the Treasury Department for singling out their deal for what they consider unfair treatment.
Let's take a closer look at the issues raised by these and other cases.
Are antitrust regulators cracking down on deals?
Experts note that the Obama administration has been tough on antitrust issues since it took office. And it has been decrying inversions as "anti-American" for a while, though the recent actions are the boldest moves against them yet. In all last year, eight mergers were abandoned after the Department of Justice objected to them, the most since 2012, according to the department's data. So far this year, three deals have been scuttled for that reason.
"Many large corporations truly believe the administration's attitude on corporate mergers is anti-business and politically motivated," said Roy Smith, a professor at New York University and a former Goldman Sachs partner, in an email. "Those more left-leaning think government has to protect the people from greedy corporations, etc. There is no agreed answer to the question. But it seems to be true that the Obama people are more restrictive on M&A than the (Bill) Clinton people were."
What's new?
Bill Baer, the Justice Department's top antitrust regulator, recently testified to Congress that his staff faces "unprecedented challenges" in doing its job as global mergers have "reached historic levels." In fiscal 2015, 67 proposed mergers were valued at more than $10 billion each, more than double the annual volume in 2014. Last year also saw 280 deals valued at more than $1 billion, nearly double the number in 2010.
What's worrying regulators n0w?
According to Diana L. Moss, the president of the American Antitrust Institute think tank, regulators are concerned about mergers in markets that have already have relatively little competition."Competition has been whittled away by 20, 25 years of relatively lax merger enforcement," she said. "Of course, there are going to be more challenges."
What has changed?
According to Duke University Law School professor James Cox, companies are taking a more "brazen" attitude toward potential antitrust issues in their deals, leading companies to take risks that they wouldn't have in previous years.
Halliburton's acquisition bid for Baker Hughes has proven to be especially problematic. The Justice Department has argued that it would drive up the costs of 23 products and services. Justice's Baer is quoted by The Wall Street Journal saying the transaction was such a bad idea that it should have never left the companies' boardrooms.
"The Halliburton deal is particularly remarkable," said Cornell Law School professor George Hay. "You're talking about two out of the three top (oil-field services) companies in the world. Absent an enormous amount of divestiture, there was never a chance that was going to happen."
And as oil prices have dropped, demand for the companies' products has plummeted. They have offered to divest billions of assets, but the Justice Department has denounced the plan as inadequate.