December 20, 2016 / 10:44 AM / a year ago

Mega-merger market set for last gasp

LONDON (Reuters Breakingviews) - Financial conditions for mega-mergers are excellent. The chances of getting them done are terrible. That’s a good thing. Nearly $850 billion of combinations worth at least $10 billion apiece announced since the beginning of 2015 were waiting to close as of Dec. 1. Among them: Dow Chemical’s $130 billion merger with DuPont and AT&T’s $85 billion bid for Time Warner. Some won’t get past trustbusters. Efforts to merge four huge U.S. health insurers into two – Aetna with Humana and Anthem with Cigna - have already been challenged. Other overpriced tie-ups deserve to be stopped. Bayer’s market value is $12 billion less than it would be had it tracked the MSCI Health Care Index since launching its $64 billion tilt at Monsanto in May. Where competition authorities don’t meddle, politicians might. In Britain, where over one-third of acquisitions since 2010 have been undertaken by foreign companies, officials are now debating new powers to block deals on national-interest grounds. U.S. President-elect Donald Trump’s plan to “Make America Great Again” may preclude selling companies to China. That could be fine, since China is imposing new restrictions to prevent capital flight.

As an M&A cycle winds down - global deal volume has fallen 17 percent from a year ago - big targets can be pricier, too. Weaker companies not yet picked off in a shrunken industry may command an unjustifiable scarcity premium. Already, fewer than half of bigger buyers are experiencing a share-price bounce on a deal’s announcement, according to Thomson Reuters data. In early 2009, it fell to one in five. It would be a welcome development if jumbo deals ran out of gas. They’ve worsened the gradual transfer of value from workers to investors. Anheuser-Busch InBev, which took over rival brewer SABMiller in October for $103 billion, is a master of generating cost savings. That’s great for shareholders, but such efficiency may be lost on workers being laid off.

Since debt remains cheap and costs of capital are falling, companies could focus animal spirits on smaller prey. Those generally turn out better for bidders, according to a 2007 Boston Consulting Group study. They also tend to come with less red tape and more genuine innovation. Acquisitions of under $1 billion are just one-third of total deal value, compared with 45 percent in 2013. With any luck, modest mergers will pick up steam.

This view is a Breakingviews prediction for 2017.

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