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 Five of these blockbuster deals have been withdrawn — two of them in 2016 alone!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The fifth largest deal ever to be withdrawn also happened this year: Honeywell’s $103-billion acquisition of United Technologies, which was sunk in early March, after UTC spurned Honeywell’s offer,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The Pfizer-Allergan debacle brought the US-withdrawn mergers and acquisitions to $298 billion so far in 2016 — already an all-time US record, and the year has just started!
In terms of global M&A, it pushed total withdrawn deals in 2016 to $376 billion, the second highest ever, behind only the $406 billion worth of deals withdrawn in 2007, as LBO mania was tripping over the growing cracks in the banking system.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
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.