- REUTERS/Ilya Naymushin
You may have noticed that some of 2015’s megadeals are falling apart.
The Pfizer-Allergan merger, a deal that would have been worth $160 billion, was officially scrapped on Wednesday after the US Treasury announced new rules clamping down on so-called tax inversions.
The proposed merger of Halliburton and Baker Hughes is also at risk. The US Department of Justice has filed an antitrust lawsuit to block that merger.
The two transactions highlight just how risky the mergers-and-acquisitions business, a standout performer in 2015, has become.
Market volatility through the first quarter led to a 20% decline in takeover activity versus the same period a year earlier, and now regulators are flexing their muscles to hinder transactions that have already been announced that involve reducing taxes or competition.
The unwinding is hitting stock prices too – and not just of the companies that were about to be acquired. Shares of small, M&A-focused investment banks have been walloped this week.
Goldman Sachs recently hosted a conference call with Steve Kotran, partner and head of the financial advisory practice at the law firm Sullivan & Cromwell, and discussed some of the emerging risks to the M&A business.
The bank published a research note to clients summing up the call. Here are some of the highlights:
New rules around inversions could chill the M&A market.
- Goldman Sachs
Inversions are where US companies merge with competitors outside the country so they can adopt the other country’s lower corporate tax rate.
These kinds of transactions have made up 4% to 5% of total M&A activity the past few years, according to the Goldman note.
The US Treasury on Monday announced additional measures to target these kinds of deals. The new rules were tougher than expected, according to Goldman, particularly the guidelines around earnings stripping, a practice in which US taxable earnings are reduced through the lending of money from one subsidiary to another.
These rules apply to a broad swath of companies interested in pursing a cross-border deal.
“With almost 30% of global M&A volume done cross-border over the past decade, the final quantitative thresholds associated with earnings stripping are likely to have a potentially meaningful impact on cross-border M&A appetite,” the note said.
And there are plenty of deals that will most likely be affected.
- Goldman Sachs
It isn’t just the Pfizer-Allergan deal that is affected by the change in rules.
Numerous deals that have already been announced may be affected by the new rules.
Deals involving Tyco International and Johnson Controls, IHS and Markit, and Progressive Waste Solutions and Waste Connections may also be hit.
Then there are concerns around national security.
- Goldman Sachs
“With a record year of mega-cap deals in 2015, certain sectors have become meaningfully more concentrated,” the Goldman note said. “As such, dealmakers are increasingly focused on antitrust risk when structuring transactions.”
The Halliburton-Baker Hughes deal is one example of this in action, with the DOJ filing to block the merger. As a result, the note says, companies may be hesitant to enter difficult M&A situations.
Then there is the uptick in national-security concerns. An increase in interest in US deals from Chinese buyers in particular has some US politicians concerned.
The Committee on Foreign Investment in the US, known as CFIUS, has been taking a closer look at more transactions, reviewing 147 deals in 2014.