Merger-acquisition boom raises question of when it will end

Multibillion-dollar deals that will reshape the health care and media industries have set 2018 on course to be the biggest year on record for global mergers and acquisitions. Now, after an unprecedented five years of bumper activity, deal-makers are starting to sound a note of caution.

Companies announced $2.1 trillion of transactions in the first half of 2018, putting this year on track to beat 2007’s $4.1 trillion total, according to data compiled by Bloomberg. Twenty-four acquisitions valued at more than $10 billion bolstered the numbers, the data show, including Takeda Pharmaceutical Co.’s $62 billion purchase of Shire PLC and T-Mobile US Inc.’s $26.5 billion takeover of Sprint Corp.

As the mergers and acquisitions juggernaut rolls on, some advisers are starting to ask how much longer the delirium can continue. Unlike the 2000 dot-com bubble or 2007’s subprime-mortgage crisis, though, this time there’s no one clear threat looming. Instead, myriad warning signs are cited as potential hazards.

“The U.S. and European [mergers and acquisitions] markets are firing on all cylinders, and we’re experiencing a risk-on moment,” said Eamon Brabazon, co-head of mergers and acquisitions for Europe, the Middle East and Africa at Bank of America. “What comes up, tends to normalize over time,” he

said, naming potential head winds such as high valuations, antitrust and regulatory uncertainty and geopolitical risks.

“Anyone who has seen this play out before, and is involved in the [mergers and acquisitions] market regularly, has to be aware that at some point in time some of these risks might exercise a dampening influence on the market,” said Stephen Arcano, mergers and acquisitions partner and global head of transactions at law firm Skadden Arps Slate Meagher & Flom.

But for now, the acquisition appetite is holding strong. On Wednesday, Rupert Murdoch’s 21st Century Fox increased its bid for Sky, valuing the broadcaster at $32.5 billion and besting Comcast Corp.’s earlier offer.

Since the S&P 500 Index hit a record high in January, a widening trade war with China and geopolitical tensions around the U.S. relationship with both North Korea and Iran have rattled markets. Regulators such as

the Committee on Foreign Investment in the U.S. have cracked down on takeovers of homegrown companies by overseas suitors, scuttling the biggest deal of the year after saying Broadcom’s attempt to acquire Qualcomm could pose a national-security risk. President Donald Trump blocked the deal in March.

Investors are also starting to sound a note of caution on the record levels of mergers and acquisitions, sending down shares of companies that announced deals by the most in at least a decade.

The global mergers-andacquisitions market, measured by the share- price performance of both acquirers and target companies, had its worst quarter since 2008, according to a report from Willis Towers Watson. Deal-makers underperformed global indexes by 6.1 percentage points in the first quarter of 2018, a dramatic reversal of the trend since the start of the current mergers-andacquisitions cycle, which has seen shares beat the markets by as much as 17.1 percentage points.

“The poor performances that have followed completed deals suggest investors right

now have very little margin of error,” said Jana Mercereau, head of corporate mergers and acquisitions for Great Britain at Willis Towers Watson.

“It’s also hard to ignore that the last two occasions when [such] activity reached similar levels were a year before the financial crash in 2007 and just before the bursting of the dot-com bubble in 2000,” Mercereau said.

The sharp drop- off in deal performance signals investors’ fatigue with a cycle that’s set to deliver a fifthconsecutive year where deal volumes top $2.5 trillion, the Bloomberg data show. Even if mergers-and-acquisitions activity is flat through the rest of the year, 2018 will still top every year on record.

“It likely will be a record year, but it’ll be difficult to maintain the pace we’re on for another six months,” Steve Krouskos, global vice chairman of transaction advisory services at EY, said in an interview on Bloomberg TV.

Still, credit market investors are largely ignoring rising leverage and deteriorating covenants, remaining ready and willing to support deals with debt. Sale of U.S.

investment-grade bonds tied to mergers and acquisitions surged by 50 percent to $154 billion in the first half compared with a year earlier, data compiled by Bloomberg show. And it’s not likely to let up in the second half, with more than $1 trillion in merger-and-acquisition debt deals pending, according to Bloomberg Intelligence.

“One of the unique aspects of the current backdrop is that it’s been active both across corporate acquisition finance as well as leveraged buyouts,” said Anish Shah, global head of investment grade acquisition finance at Morgan Stanley.

“In terms of the magnitude of deals that can get done, Broadcom and Cigna are both good benchmarks,” Shah said, referring to Broadcom’s blocked bid for Qualcomm and Cigna Corp.’s $54 billion bet on Express Scripts Holding Co.

“The fact that a corporate acquirer could obtain $100 billion in committed financing opens up a lot of possibilities,” he said.