Last year was a roller coaster around the globe, creating a rise in geopolitical uncertainty. For lawyers and their corporate clients, Britain’s vote to leave the European Union and Donald Trump’s victory in the U.S. presidential election came as a shock. As we all face unfamiliar terrain, Reuters’ Breakingviews offers their predictions for 2017 on issues such as M&A to the U.S. economy and more.
Last Gasp for Mega-mergers?
Financial conditions for megamergers are excellent. The chances of getting them done are terrible. That’s a good thing, according to the report by John Foley.
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% 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.
For the full report of Reuters’ Predictions 2017: Seismic Shifts click here.
Big targets can be pricier, and in a shrunken industry, weaker companies may command unjustifiable scarcity premium, observed Foley in the report. “It would welcome development if jumbo deals ran out of gas.” While debt remains cheap and the costs of capital are falling, companies may want to focus on “smaller prey” that has less red tape and more genuine innovation.”
Disney & Netflix
Practical Magic? Walt Disney, the $160 billion entertainment conglomerate‚ is hunting for technology that will connect consumers directly with its movies and TV shows — and also needs a successor to Chief Executive Bob Iger, writes Jennifer Saba in the report. “A Netflix acquisition, including founder Reed Hastings, might just answer both dreams — though it could be pricey.”
Disney’s shares have declined by about 20% since 2105; Iger blamed part of that on fewer people paying for its cable sports and ESPN. At the same time, Disney has been among the forward thinkers by bypassing traditional cable boxes, notes Saba. And Iger spent $1 billion for a one-third stake in Major League Baseball’s streaming technology, with the option to buy it out.
“Netflix could provide more streaming know-how and 87 million subscribers worldwide. Hastings could be a candidate to replace Iger, who is slated to step down in 2018,” she said. Netflix trades more than 100 times next year’s estimated earnings, compared with Disney’s 16 times multiple.
Protectionism: Key Threat to China’s M&A Boom?
“Protectionism is the top threat facing Chinese dealmakers. Beijing may clamp down on overseas acquisitions and stop companies splurging billions on non-core businesses,” says Rachel Morarjee in the report. “But mooted restrictions would not have halted most recent big deals. A larger headache could be Western countries raising the drawbridge.”
“Chinese companies went on a record buying spree in 2016, amassing more than $200 billion of deals by late November,” she reports. “That seems to have led to official indigestion. Media reports suggest regulators are preparing to restrict or bar outbound deals above $10 billion, and to take a tough stance on $1 billion-plus deals outside a buyer’s core business. Currency controls are also tightening.”
But the curbs may not be as draconian as expected, predicts Morarjee. Few deals “are both big enough and left-field enough to obviously fall foul of the mooted rules.” A bigger challenge may be “the western backlash against globalization … with various countries erecting barriers to Chinese investment,” she said. “The PRC seems certain to get a rougher ride in President-elect Donald Trump’s America.”