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Final flexing

6 April 2016 By Rob Cox

All good parties must come to an end. And so the cops have arrived right on schedule to break up America’s orgy of corporate promiscuity. The ferocious intervention by U.S. authorities, citing antitrust, tax and national security concerns signals end days for the current mergers and acquisitions boom. The only surprise is that many investors have underestimated this inevitable juncture.

In just the past three years, more than 134,000 deals have been announced around the world, totaling some $11 trillion, according to Thomson Reuters data. As in previous cycles, investors applauded the first stage of deal-making in 2013, when companies in overlapping businesses got together and paid premiums that were more than compensated by future efficiencies. 

Then came the somewhat harder to justify couplings, often predicated on hopes for higher sales or moving into adjacent markets. The tail end of the merrymaking has brought transactions like Pfizer’s $160-billion purchase of Allergan, which only made financial sense as a way to circumvent things like poorly designed tax policies.

The U.S. Treasury, which on Tuesday tightened rules governing the ability of companies like Pfizer to switch their tax domiciles through financial engineering, just torpedoed that logic. Pfizer is now expected to walk away from the deal. And so it should: Without the tax wheeze, the Viagra-maker led by Ian Read would be overpaying by some $17 billion for its conquest, according to Breakingviews calculations.

Antitrust authorities are joining the tax police in cracking down on corporate envelope-pushing. To be fair, the Department of Justice and Federal Trade Commission have been watchful all along, striking down combinations like AT&T’s purchase of T-Mobile US and the mooted merger of Office Depot and Staples. But an imminent lawsuit to upset a tie-up of Halliburton and Baker Hughes suggests that vigilance is intensifying during the final year of the Obama presidency.

Adding to the mix is heightened scrutiny of takeovers by increasingly acquisitive Chinese companies by the Committee on Foreign Investment in the United States, which has helped to nix deals including the proposed purchase of a 15 percent stake in hard-disk drive maker Western Digital.

The Treasury’s new tax rules were a shock to Allergan shareholders, who incinerated $16 billion of the company’s value in response. Baker Hughes owners have been more circumspect. The shares have traded at a discount of as much as 25 percent to Halliburton’s offer in recent months. As Uncle Sam increasingly flexes his muscles, such sobriety looks the right way to play the end of the M&A bonanza.



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