Regulators Turn Focus To Mergers & Acquisitions Mega Deals by Bryan Adams, FactSet
Recently US regulators have forced a re-assessment of two major mergers & acquisitions deals: Pfizer’s $194 billion combination with Allergan and Halliburton’s $39 billion takeover of Baker Hughes. Rumors of potential action from the US Treasury and the Department of Justice (DoJ) surfaced in the media on April 4, and almost immediately the arbitrage spreads for these deals felt the impact as traders’ confidence in the deals being completed quickly waned. Typically the target’s share price and the deal’s offer price converge and the spread moves to 0% as deals inch closer to completion and the risk of cancellation is reduced; clearing regulatory hurdles also helps lower the spread.
Mergers & Acquisitions Mega Deals – Pfizer and Halliburton Deals Feel Regulatory Heat
In Pfizer’s case, the spread jumped to 52% on the news. The deal had long been in the regulatory spotlight as the largest corporate inversion—with Pfizer looking to move its tax base to Ireland where Allergan is headquartered—but the spread sat comfortably in the 15-25% range since it was first announced. Notably, this was Pfizer’s second attempt at an inversion after having tried (and failed) to combine with AstraZeneca of the UK in a $121 billion deal in 2014. With new rules proposed by the Treasury effectively blocking deals such as this, Pfizer was left with few options and the deal was withdrawn.
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In Halliburton’s case, the spread remained near 10% until last summer when it started trending upwards and became more volatile, spiking up then settling down in mini-cycles. Again, with the rumors of the DoJ planning to block the deal on antitrust grounds, the spread moved from its previous high of 35% to a new high of 47%. The deal has not yet been cancelled, and no doubt Halliburton is working to clear the DoJ’s hurdles. The spread has since eased, likely as result of Halliburton’s work, but also as rumors surface of Carlyle Group willing to step in and acquire assets from the deal.
Bigger Deals Mean Bigger Regulatory Risk
Mega-deals tend to carry additional regulatory risk, so the spreads can be wider than smaller deals where antitrust concerns are less likely, as is currently the case.
Deal makers may not like the regulatory scrutiny, but in the US the volume and value of deals over $1 billion neared peak levels in 2015, with a billion-dollar deal announced on average every 1.3 days. That frequency has been steady since 2014 and only just missed 2007 record levels of a deal every 1.2 days. Clearly regulators are being inundated with deals to review.
To regulators’ credit, though, billion-dollar deals aren’t collapsing at a higher frequency. With the exception of Pfizer/Allergan’s impact on value, current levels of withdrawn deals are below historical averages.
Arbitrage Spreads Point to Less Risky Path to Completion
Several other large deals are still pending, but the arbitrage spreads suggest a less risky path to completion. For example, with continued consolidation in the drinks industry—and the largest drinks deal ever—Anheuser-Busch InBev and SABMiller’s $121 billion combination initially showed spreads above 25% but has since settled into a 10-15% range. This is largely because the companies have agreed to divest certain operations (notably selling Peroni and Grolsch to Asahi for $3 billion) to stay out of regulators’ crosshairs and win approval of the deal. So far, the market seems to agree.
In another example, Dow Chemical and DuPont have agreed to an unusual $68 billion deal in which the two giants will combine and subsequently split into three separate companies. The market initially did not seem to like the deal, and it maintained a negative spread, meaning that the target share price was higher than the bidder’s offer price. However, the spread has since moved positive and stayed around 1-3%. Had the two companies decided to stay together rather than split up, the deal would no doubt be getting more regulator interest.
Number of Major Insurers Could Drop by Half
However, consolidation in managed health care, specifically the insurance sector, has been getting attention, and the two large deals in that area warrant a closer look. Aetna and Humana, the second and third largest insurance providers in the US, agreed to a $36 billion deal that would create the largest insurer with combined revenues of $107 billion. Not to be outdone, the first and fourth largest insurance providers agreed to a deal when Anthem offered $51 billion for Cigna which will have combined revenues of $109 billion. Reducing the number of major insurers from four to two will no doubt get intense regulatory review.
In Aetna’s offer for Humana, the spread has averaged 22% since the deal’s announcement.
In Anthem’s offer for Cigna, the spread has averaged 26% since the deal’s announcement.
With the recent regulatory impact on mergers & acquisitions, both deals have seen an uptick in spreads as the market waits for further news. The subsequent announcement that UnitedHealth Group plans to withdraw from a majority of health insurance exchanges is also likely to weigh on the regulatory process.
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