Biggest losers: Investment Banks.
There have been 12 announced mergers and acquisitions with a deal size of $100 billion or more in the world ever. Five of these blockbuster deals have been withdrawn — two of them in 2016 alone!
Pfizer’s $160-billion acquisition of Allergan, the second largest merger ever when announced in November 2015, entered the M&A annals on Wednesday, when the company announced that it would abandon the deal — the largest deal failure ever.
The fifth largest deal ever to be withdrawn also happened this year: Honeywell’s $103-billion acquisition of United Technologies, which was sunk in early March, after UTC spurned Honeywell’s offer, citing among other things increasingly nervous antitrust regulators.
One blockbuster deal is still pending: The $117-billion effort by Anheuser-Busch InBev, the largest brewer in the world, to acquire SABMiller, the second-largest brewer in the world. The deal was announced last year. Combined in their current form, they’d produce about a third of the world’s beer. Antitrust regulators around the world are nervously poking around the deal.
The other three of the top five scuttled deals were spread out over time, according to Dealogic: BHP Billiton’s $148-billion acquisition of Rio Tinto, in November 2008; Pfizer’s $123-billion acquisition of AstraZeneca, in May 2014; and MCI WorldCom’s $111-billion acquisition of Sprint (first bid) in October 1999.
The Pfizer-Allergan debacle brought the US-withdrawn mergers and acquisitions to $298 billion so far in 2016 — already an all-time US record, and the year has just started!
In terms of global M&A, it pushed total withdrawn deals in 2016 to $376 billion, the second highest ever, behind only the $406 billion worth of deals withdrawn in 2007, as LBO mania was tripping over the growing cracks in the banking system.
It seems the government is re-discovering its teeth to face global corporations. New rules issued by the US Treasury against “tax inversion” deals might have been specifically designed to broadside the largest tax inversion deal in history. Pfizer had pushed its luck and got bitten.
These tax inversion deals have been going on for years. The idea is to acquire a foreign company domiciled for tax purposes in a cheap tax jurisdiction, such as Ireland, and then also for tax purposes, switch the acquiring company’s headquarters to Ireland as well, even if no headquarters honchos or other headquarters personnel or researchers or marketing people ever set foot on the island.
It’s just a small piece of the vast and complex network of opportunities made graciously available to the largest US corporations to avoid having to pay taxes in the US.
Pfizer, which had been looking for a tax inversion deal for years, has already dodged US taxes on $128 billion of profits that it registered overseas, though the money — the part that still exists, if any — could be invested anywhere, including in the US. Only profits, an accounting figure, are registered overseas. But seeing the Treasury’s bared teeth, Pfizer’s board voted to abandon the deal.
Allergan itself is a product of a series of these tax inversion deals. In 2013, Actavis, based in Parsippany-Troy Hills, NJ, USA, acquired Warner Chilcott, based in Rockaway, NJ, USA. Warner Chilcott was already domiciled in Ireland for tax reasons. This deal allowed Actavis to domicile in Ireland as well. Actavis then went on an acquisition binge that culminated in Botox-maker Allergan, whose name it pasted on the overall company.
Which shows that there are much more important reasons than tax-avoidance shenanigans to block the relentless oligopolization and monopolization of Big Pharma, health insurers, hospital chains, and others: they do nothing but drive up prices and insurance costs for everyone in the US.
The blow left Pfizer scrambling for solutions: In the announcement, it said that it would decide “by no later than the end of 2016” if it wants to separate its “established” business division, focused on generic drugs, and its “innovative” business division, focused on high-profit patent-protected drugs.
The government’s suddenly refreshed recollection that it has teeth also became apparent when the Department of Justice, also on Wednesday, filed a civil antitrust lawsuit to block Halliburton’s $25 billion takeover of arch-rival Baker Hughes, alleging that “the transaction threatens to eliminate competition, raise prices, and reduce innovation in the oilfield services industry.”
These are the three fundamental reasons for all these blockbuster mergers, in addition to any tax avoidance shenanigans.
As spelled out in the merger deal, Pfizer will pay Allergan a break-up fee of $400 million. The board also decided to pay Allergan $150 million “for reimbursement of expenses associated with the transaction.”
The real losers are the investment banks. On Pfizer’s side: Guggenheim Securities, Goldman Sachs, Centerview Partners and Moelis & Company; on Allergan’s side: JPMorgan and Morgan Stanley. According to the Financial Times, they were looking at a combined payday of $350 million in fees, “the largest amount in M&A history,” now gone up in smoke.
If the collapse of recent mega-deals is an indication of how the rest of 2016 will go, if this uncertainty pulls the rug out from under M&A activity even more so than the already tightening credit conditions, it will remove another prop from under the ludicrously inflated top-heavy stock market.
Extracting big-fat fees coming and going is the lifeblood of investment banks. And this debacle comes on top of an already terrible first quarter for investment banks, in terms of revenues the worst since 2009, when the bond market imploded, and in some cases the worst since Q1 2001 when the dotcom bubble imploded. Everywhere but in China. Read… The Big Unwind Hits Investment Banking
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“a combined payday of $350 million in fees”
Good point, lost revenue but sure they aren’t paid some portion of that regardless?
I’m still wondering when the debt clock times out and these guys sweep in to gorge for pennies on the dollar…….
Some years ago the Economist magazine estimated that only one in six mergers created value/were profitable in the long run.
Re: created value/were profitable
Well, as usual, the economist isn’t measuring who actually got the value and the profits.
The whole thing is choreographed like a ballet. The acquiring company’s executives write themselves large bonus checks for their acumen in acquiring the other company at a “bargain” price. When the promised “synergies” don’t appear and the cultures clash, they spin off the other company and write themselves large bonus checks for creating shareholder value. Simple isn’t it ?
You forgot seniority where one class of bond holders get to throw everyone else under the bus and own all the “stuff”.
None of this is new – same old song, new band. :-)
Regards,
Cooter
The tax inversion scheme for M&As is obviously over. Interestingly, any of the previous Tax Inversions are also under IRS scrutiny on the back end. No more asset stripping. I bet those companies didn’t see that coming.
http://blogs.wsj.com/briefly/2016/04/05/treasurys-new-inversion-rules-at-a-glance/
This is my gut talking – nothing material, academic, or even historical in the sense of context/reference. Forgive my use of quotes, but I need to use my words “creatively” so you can follow my train of thought.
Governments the world over are broke, starved for cash flows, and CBs can’t carry the baton forever. Money printing works for a little while – but it doesn’t “solve” anything. So, someone in the halls of power is looking for a “solution”.
The panama paper crap that broke recently (I see this as very, very tainted) is just a vehicle to bring the tax hammer down on “not-insider-enough” folks with money. Praise Jesus, REVENUE!
We all know “they” do it, and maybe they can throw a few “splinter” (i.e. annoying) politicos under the bus, but the purpose is REVENUE – and it is clearly stated this isn’t “all the theys”.
This also scares/cautions would be evaders to (not) avoid paying their “fair share”. Look for a few prosecutions – and settlements with penalties.
The upper crust of power will always avoid prosecution/laws because they are the upper crust who make the laws, enforce the laws, and hold the power- but they are clearly knuckling down on the “just below the upper crust” – so … let’s decide – WHY?
And that is a curious development that will have to play out before anyone can draw conclusions.
Maybe S**T is finally going to get real!
Regards,
Cooter
They’ve squeezed the middle class dry. The poor have no money. Time to go after the next rung up. Wealthy professionals who, like you say, don’t have the connections to prevent exposure.
Here’s another explanation:
A tiny law firm in Panama gets hacked, and a tiny number of people who do “off-shore stuff” get caught, publicly, with their hands in the cookie jar.
Tabloid newspapers and (some) governments act excited and sort-of investigate & (here’s the important thing) prosecute. Note: this same phenomena happened with the 2014 Luxembourg tax leak.
In a few years we’ll know how many tax prosecutions took place (best guess: not many).
I don’t know what % of the Luxembourg tax cheats were prosecuted, but the leakers (Antoine Deltour, another PwC employee, and a French journalist named Edouard Perrin) sure were. WHEW! Talk about shooting the messenger.
This end of the credit cycle has broken.
Wealth liquidity is no longer interested in risky yield. Which in today’s market place is almost any paper financial vehicle! What is searched for is not a return on wealth, but a wealth preservation destination.
As can be ascertained by recent auction prices. A blue diamond selling for over $40 million, a 1932 Duesenberg Model J selling for $2.54 million, a 1965 Shelby Mustang selling for $138,000 dollars.
Anything of a perceived retainer of value by the wealthy, is being snapped up as a safe place to store that wealth. The recent strength of the price of gold and silver prove this to be the case.
These wealthy are “nuvo”. Let them rule a world without wealth – as they desire. Feast upon it!
Perhaps the elite have a plan, but the energy inputs required to hold this all up will not last a youngin’ with a long life span.
I say this simple because it calls into question the true value of capital in a global system where that global system may start to separate into islands.
Perhaps the opportunity you lament lies locally…
Regards,
Cooter
Perhaps they should address the real problem which are parasitic tax rates here in the US.
“Perhaps they should address the real problem which are parasitic tax rates here in the US.”
Is corporate welfare also parasitic? That’s where it all goes, you know.
Taxes are for little people. You’re just bitter because you missed out on Panama.
Well, call me cynical, but corporations don’t really “pay ” taxes – consumers do (it’s in the price of goods). I do admit there is a lot of noise about “after tax profits” but that’s a kabuki show.
So if I’m politician, why do we have corporate tax laws?
Well, corporations are concentrated points of ownership (i.e. not as many of them as there are consumers), and THEY PAY HUGE “CAMPAIGN CONTRIBUTIONS” for regulatory and tax breaks.
Do you mean the parasitic tax rates on us worker bee stiffs? Let’s start there.
Read this and weep: http://taxfoundation.org/article/tax-freedom-day-2015-april-24th
The wealthy write off hobbies, traveling,vacations, etc as business expenses. Maybe we should all file multiple DBAs (cheap) on everything we do…and write it off. Have not kept up with current tax code, but in the past you could have 2 years of losses without scrutiny. Cook at home a lot…then say you are in cooking business hoping to cater or develop cookbook. Write off all of your groceries and utensils. Oops business failed. Like to work with your hands at home…write off all of your tools and say your Handyman business didn’t pan out. Have pets…say you are in breeding business and write off all of their expenses. Vacations could be written off as research on my cooking, home improvement, pet breeding endeavors. All of bar and restaurant expenses are research for a blog or business meetings with other cook, handyman, pet business owners.
Kids in sports…have them do a local workshop for $10 and then write off all of their yearly expenses for equipment, uniforms, lessons,etc., as the cost of their workshop business “brand.”
Sorry for the rant but what break do we get? That is why I am so excited about the Panama Papers. These folks have all this mega money and still get to scam the system.
No, they want to shut down all sources of pollution and global warming, that’s you and me. They’ll strip us of as much wealth as possible, on the way.
If it was that easy, you could open a tax practice and make bank.
It isn’t.
There are technical (not fair) reasons why wealthy folks can write stuff off. Don’t over simplify – but if you can deliver on all that, have a license to practice tax accounting/law, please give me a call.
My understanding is that the way the rich do this requires a fair amount of sophistry that is not “practically affordable” to the working guy – so only the deeper pockets get to play the game.
I am happy to be wrong, but I would just like a proper detailed summary as to why.
Regards,
Cooter
Since no one saw the new Treasury rules coming – or at least i don’t recall any recent articles noting that they were being contemplated – then i wonder how they got here.
In other words, why now? Why not last year? Why not two years ago? The same circumstances and activity that begat the new rules existed back then as much as now.
Does the timing have anything to do with the specific deals and companies mentioned?
Pfizer is certainly notorious enough. Honeywell and UTC participate in a fair amount of federal contracting, if I’m not mistaken. As far as the financial institutions involved, that’s been an ongoing concern.
Didn’t they know it was coming through their private channels? Wouldn’t they have fought back? Or did they approve of the new rules for reasons of their own?
I’d be curious any article – past, present or future – that tells the backstory to the rule change.
Combined with recent antitrust concerns (also mentioned above) and the Panama Papers release, do i detect a whiff of coordination?
On the other hand, when one finds a bunch of dead leaves at the base of a tree, is it a conspiracy?
I suppose it depends on the season (timing).
When this practice began to “steamroll”, Obama vowed to “address” it. There really isn’t much that can be done once a company decides it wants to move to another country, I bet Canada would gladly open their border?
Congress has been in the business of subsidizing employment in other countries for nearly 3 decades via globalization. Despite the global warming implications of American style consumerism, citizens of every developing nation watched and craved, as global consumerism propagated.