Today’s corporate dealmakers would rather beg forgiveness than ask permission.
Several big companies across a handful of industries are pushing ahead with aggressive proposed mergers that challenge regulatory boundaries, as newly adventurous CEOs and boards bet they can force combinations that lawmakers and tax authorities may not be ready to bless.
More than $1.3 trillion in global mergers and acquisitions have been announced so far this year, almost double the volume of a year ago and the most since 2007. The (arguably belated) reawakening of corporate deal lust has swept across industries such as telecommunications, pay-TV and healthcare, which are undergoing rapid technological and business-model shifts that spur strategic scrambling.
Meantime, opportunities for cross-border tax arbitrage by companies with heavy overseas cash profits are emboldening aggressive deal structures that have prompted political pushback.
A rush of deals
Comcast Corp.’s (CMCSA) agreement to acquire Time Warner Cable Inc. (TWC) for $45 billion and create the largest cable provider faces strong and layered regulatory scrutiny. This deal’s prospect for redefining “big” in pay TV, which among other things threatens to give Comcast enormous clout in negotiating with cable networks, has reportedly led AT&T Corp. (T) to prepare a $50 billion offer for DirecTV Corp. (DTV).
Over in pharmaceuticals, Pfizer Inc. (PFE) has made the attractiveness of moving its legal headquarters to the U.K. for tax purposes a central element of its $100 billion hostile bid for AstraZeneca PLC (AZN), eliciting a noisy response by members of Congress who decry such “tax arbitrage” maneuvers or believe they should catalyze broad tax-reform measures.
Investment bankers and lawyers say plenty of similar “tax inversion” deals are being considered by companies who have lost hope of comprehensive tax-rate reduction and code simplification here, and simply can’t watch cash pile up, ostensibly “trapped” overseas.
While the agreed-upon merger of advertising giants Omnicom Corp. (OMC) and France’s Publicis Groupe was abandoned by both parties last week amid intense antitrust reviews on three continents, the very fact the players inked a deal says they were willing to challenge antitrust authorities. Analysts suggest top executives simply saw the benefits of a merger as no longer worth the trouble, and did not truly concede defeat to regulators.
Last year American Airlines parent AMR Corp. swallowed US Airways to form American Airlines Group (AAL) in a deal first opposed by consumer groups and some legislators but ultimately allowed, as the domestic airline business has rationalized into an virtual oligopoly.
Valeant Pharmaceuticals Inc. (VRX) and activist hedge fund manager Bill Ackman walked the edge of the law in amassing a big stake in Allergan Inc. (AGN) before launching a hostile bid for the Botox maker – and are using Valeant’s Canadian base as ammunition in arguing its offer is superior to any alternative, due to more favorable tax treatment there.
General Electric Co. (GE), similarly, was not deterred from its $13 billion effort to buy the power assets of French industrial flagship Alstom by the predictable opposition of politicians in Paris.
Leaping before they look
To one degree or another, these contemplated or completed deals are animated by a calculation by CEOs that they must leap before they look for clear signals that such marriages will ultimately be blessed.
As one hedge-fund executive put it this week, there’s a rush to “just get a deal done” rather than worry about whether it fits with existing regulatory thinking. “In a capitalist economy, once a deal is done, it’s hard to undo.”
Perhaps the quintessential example of a ground-shaking merger that led to an important regulatory rubber stamp after the fact, the 1998 union of Travelers and Citicorp to create Citigroup Inc. (C) led directly to the formal repeal of the Glass-Steagall Act that cleaved commercial and investment banking for six decades.
That same year, AT&T acquired the big cable operator TCI, which today forms the core of AT&T’s broadband offerings that would be joined with DirecTV’s satellite-video business if the reported merger talks bear fruit. At the time, the notion of melding telephone and cable programming was controversial.
For investors, this all suggests the swelling M&A wave could gain more momentum still, as one deal begets another within industry after industry and the ample fuel of cheap debt, high stock prices and pent-up demand for empire building catch a spark. This is classic mid- to late-bull market action, when confidence returns and a mature cycle encourages companies to “buy growth.” Some, such as Rob Cox at www.breakingviews.com, see this as a potential deal bubble, a percolating risk for markets. Usually, M&A acts as support for stock-market values for some time before the deals grow silly, companies start to overstretch and value is destroyed in big chunks.
Boldness in the boardroom can also lead, eventually, to companies needing to ask forgiveness not only from regulators but from shareholders as well. This is especially true when deals are pursued mostly because “everyone’s doing it,” or as a distraction from a pressured core business.
Veteran telecom analyst Craig Moffett, at research firm MoffettNathanson, clearly feels the floated AT&T-DirecTV deal qualifies as such a desperate overreach:
Like skid-row junkies in the final wretched tremens of downward spiral, telecom/cable/satellite investors now appear to need a deal fix almost daily to stave off the messy crisis of incontinence that comes with the inevitable withdrawal. Never mind the fundamentals… just spin the bottle. Today’s deal is AT&T and DirecTV. Like any merger born of necessity rather than opportunity, the combination of AT&T and DirecTV calls to mind images of life boats and rescues at sea.
Interestingly, shares of AT&T and DirecTV gave up morning gains as Wall Street digested the reports and implications of a deal – perhaps investors' way of trying to withhold permission so there will be no need to grant forgiveness later on.