Political upheavals may herald trouble for megadeals

LONDON: As companies brace for the impact of 2016’s political shocks and looming elections next year, global appetite for mega mergers may slow amid the prospect of increased protectionism.

The biggest transactions mostly involved buyers and sellers from different countries: Bayer AG’s acquisition of Monsanto Co in the US, China National Chemical Corp’s bid for Syngenta AG and SoftBank Group Corp’s purchase of ARM Holdings Plc. Cross-border deals accounted for more than half of acquisitions larger than US$25bil announced this year, according to data compiled by Bloomberg. They also made up nearly half of the US$3 trillion in total announced deals, the data show.

But the sources of international merger and acquisition (M&A) are becoming more inward looking and protective, and it’s still unclear how political changes will affect businesses. Chinese firms are facing regulatory scrutiny abroad, with growing opposition in the US and Europe, and restrictions on megadeals at home.

In the West, the US elected Donald Trump as its next president – a decision with potential implications for US companies’ tax bills and the reception that bidders, especially Chinese, could get when they target assets in the country. In the UK, which voted to leave the European Union, Prime Minister Theresa May has said the country needed a “proper industrial strategy” that could be used to defend strategic industries and companies like drugmaker AstraZeneca Plc.

Next year, Europe will also see elections in the Netherlands, France and Germany that could unseat incumbent leaders and strengthen populist, nationalist movements across the continent. These votes could have ramifications for the EU and eurozone, causing more instability and volatility in the currency bloc.

The largest acquisitions already saw a decline this year. There were 13 deals above US$25bil announced in 2016, slightly below a year earlier, according to data compiled by Bloomberg. The value of total transactions announced is down about 18% from last year.

“Lack of confidence is never good for dealmaking,” said Hernan Cristerna, global co-head of mergers and acquisitions at JPMorgan Chase & Co. in London. “If CEOs are trying to gauge the benefits of a big deal and don’t know how the regulatory environment will play out, some may be hesitant to push the button.”

More than US$580bil in deals were terminated this year, according to the data, some of which can be attributed to a stricter regulatory landscape. The largest failed deal was Pfizer Inc’s US$160bil attempt to take over rival drug maker Allergan Plc. That was quashed when US regulators proposed new rules to limit so-called tax inversion deals, in which a company gets an address in a more favourable tax regime as part of an acquisition.

The US also blocked deals that it saw as a threat to its national interests, including Chinese-backed Grand Chip Investment GmbH’s plan to buy German chipmaker Aixtron SE, which supplies American defense companies. — Bloomberg