After a year in which regulatory hurdles played a role in the highest volume of deal withdrawals since the financial crisis, changes in Washington spurred expectations for a sharp 2017 pickup in mergers and acquisitions.
But a handful of deal setbacks this year raises the question: Are these busted transactions a signal that the regulatory environment will remain more entrenched than anticipated, or are they just part of the noise created by a lumbering transition toward a less onerous atmosphere for business?
So far this year, notable deals altered or undone include:
Aetna Inc. dropped its plan to buy Humana Inc. in a $34 billion pact after a federal judge ruled against the deal.
A $48 billion merger between healthcare providers Cigna Corp. and Anthem Inc. blocked by federal courts in May.
Walgreens Boots Alliance Inc. opted to settle for a much slimmer deal with Rite Aid Corp., ditching a planned $9.4 billion takeover in favor of a roughly $5.2 billion pact to buy half of Rite Aid’s stores after the more ambitious deal was bogged down by antitrust concerns.
DraftKings Inc. and FanDuel Inc. called off their merger after the Federal Trade Commission in June filed an antitrust lawsuit to block a deal that would have united the two online fantasy sports companies.
And the New York Times reported in July that AT&T Corp.’s $85 billion bid for Time Warner Inc. was “in limbo” as regulators scour the tie-up. President Donald Trump said during his campaign that he opposed the acquisition.
“Regulatory review of large, pending deals like AT&T-Time Warner will be a good litmus test on how the US treats larger-scale consolidation,” said Ben Wallace, managing director, global M&A at J.P. Morgan. “We’re still seeing a lot of regulatory scrutiny for a variety of reasons,” he added, including uncertainty around the approach of the new administration. “Last year we saw a record number of deals withdrawn for regulatory reasons, and there is still a level of uncertainty around getting deals closed. However, people are cautiously optimistic that the deal environment will be better.”
Merrill Corporation, which facilitates the sharing and disclosure of financial information, has observed fewer "mega" deals among the transactions it’s supported in 2017, though the company’s data have indicated a substantial increase in middle-market -- and particularly lower middle-market – M&A. In terms of industries, Merrill has seen a notable increase in healthcare and oil & gas activity, while there have been fewer materials and technology mergers.
With fewer giant deals, this year is less likely to mimic a disappointing 2016 statistic: the volume of withdrawn deals in 2016, was the highest since 2008, at $842 million – or 769 deals, J.P. Morgan noted back in January in its outlook for M&A this year. The withdrawals “partly reflecting heightened regulatory pressure,” the firm said.
Still, the bank predicted the M&A market would get a boost from “strong fundamentals and the potential for pro-business policy changes,” including the potential for cash repatriation from overseas profits, corporate tax reform and “more modest regulation.”
That’s certainly still possible, and while anticipation of such policy changes has been widespread, the timing of their arrival has grown cloudier as the administration and the Republican majority in Congress struggled with healthcare legislation, pushing other important agenda items, such as tax reform and infrastructure spending, further into the future.
Agency Vacancies Contribute to Cloudier Outlook
Meanwhile, uncertainty over legislation coupled with the administration’s need to still fill key regulatory positions at the Federal Trade Commission, could damp “companies’ readiness to pursue complex deals with a possible lengthy path to completion,” J.P. Morgan said. The firm indicated that executives this year would be keeping close watch on the regulatory landscape “before evaluating significant transaction opportunities.”
Of course, antitrust issues are only one part of the regulatory edifice dealmakers must navigate. Executives also need to consider the atmosphere for everyday rules and regulations applied to industries, especially in the financial services and energy sectors. It’s in this realm that President Trump has trained his sights, issuing executive orders to rollback Obama-era statutes with the aim of freeing up businesses.
Again, there’s optimism that the president’s actions will gain traction, but their sustainability and effectiveness remain in question, particularly regarding financial regulation and the administration’s ambition to dismantle much of the Dodd-Frank Act. It’s not likely to happen without a fight, and some high-ranking voices are weighing in.
Federal Reserve Chairwoman Janet Yellen warned in July testimony to the Senate Banking Committee that proposed changes to regulations could create the potential for another financial crisis. “It is important that we maintain the improvements that have been put in place that mitigate the risk and potential damage,” the Fed chair said. The central bank's vice chairman, Stanley Fischer, called efforts to defang post-crisis curbs on banks "dangerous and extremely short-sighted," in a recent interview with the Financial Times.
Meanwhile, the FTC is thinly staffed at the decision-making level, with just two of five commissioners currently in place. Other agencies, including the Federal Communications Commission, Securities and Exchange Commission and the Commodities Futures Trading Commission all still have vacancies in important oversight roles and are without a clear timetable on when they’ll be filled.
The Wall Street Journal noted the FTC currently “can’t challenge a merger or a questionable business practice, or approve a settlement, unless Republican Maureen Ohlhausen, the acting chairwoman, and Democratic Commissioner Terrell McSweeney agree.”
It will be difficult for those agencies “to make any sweeping regulatory moves” before those posts are filled, wrote Jerri-Lynn Scofield, a securities lawyer who now covers legal and regulatory topics for the Naked Capitalism blog. Scofield doesn’t see those positions being filled anytime soon, so “these agencies will merely be marking regulatory time -- neither putting forward new regulations, nor dismantling existing ones.”
Ultimately, dealmakers want clarity and confidence that the cost of pursuing a merger or acquisition will pay off. After the FTC’s move to block his company’s tie-up with FanDuel, DraftKings CEO Jason Robins summed it up this way to the Wall Street Journal: “Now that this added additional cost and time and distractions, it was the right time for us to take a step back and say, ‘Is this worth it?’”
About Merrill Corporation
Merrill Corporation help firms globally securely protect, share and collaborate on their most sensitive and confidential content. Its industry-leading virtual data room, Merrill DataSite, ensures the right information is shared with the right people, leading to successful mergers and acquisitions. Merrill helps create and file initial public offering documents, as well as periodic financial disclosures required by the U.S. Securities & Exchange Commission.