Corporate dealmaking skids to a halt

Big buys are going up in smoke for their own reasons, but broadly speaking, broader clamps could be coming down on mergers and acquisitions.

By InvestorPlace Aug 7, 2014 12:27PM

Credit: © Richard Levine/Alamy
Caption: T-Mobile and Sprint cellular phone stores in Herald Square in New YorkBy Anthony Mirhaydari


Not one, not two, but three big merger and acquisition deals were the source of investor consternation on Wednesday, undermining some of the confidence in the ability of cheap credit, corporate cash, animal spirits and eager executives to bolster stock prices by consolidating.


More than $100 billion worth of proposed mergers were pulled as 21st Century Fox (FOXA) ended its bid for Time Warner (TWX) while Sprint (S) bailed on its pursuit of T-Mobile (TMUS).


Moreover, Walgreen (WAG) said that while it would still buy up the remaining share of European pharmacy chain Alliance Boots, it wouldn't relocate its tax base overseas to escape the higher U.S. corporate tax rate.

Aside from a relief rebound in 21st Century Fox, the stocks of the companies involved all took a hit. The largest was the near 19 percent drop in Sprint, which boosted the two put option position in the stock I recommended to clients back on July 31. The Aug $8 puts are up more than 310 percent while the Sep $8 puts are up more than 252 percent.


Aside from short-term profits for traders, the news could represent a sea change in what has been a major supporter of stock valuations in recent months: the rise of M&A activity to a frantic pace.


According to Reuters, through the first half of 2014, global M&A transactions increased to a level not seen in seven years.


What's different this time -- and in a possible sign that investors were getting overconfident -- prices of both acquirers and targets and been moving higher on announce deals. That goes against history, which suggests that acquirers tend to see share prices suffer since oftentimes, M&A deals are more about expanding the empire of overzealous executives rather than adding value to shareholders.


Moreover, after paying the premium to seal the deal, acquirer shareholders are relying on the synergies of the combined company to recoup costs and add value. That's highly uncertain.


Through the end of June, year-to-date global deal volume totaled $1.75 trillion, up 75 percent from year-ago levels, Thomson Reuters data says. Prices paid were higher as well, with buyers on average paying 13 times operating earnings in the first half of 2014 vs. 11.8 times last year -- the highest since 2008.


In addition to the lure of higher stock prices from a well-publicized deal and the low synergy hurdle thanks to cheap financing, a big motivator has been the ability to use M&A deals to offshore a company's tax base thanks to holes in the U.S. tax code. There been a lot of activity here in the healthcare sector.


And while the specifics of the three M&A deals that fell through on Wednesday are different, there is evidence that the two primary motivators -- cheap bond market credit and the ability to shift one's tax base offshore -- appear to be closing slightly.


For one, President Barack Obama has said he will act unilaterally, without the support of Congress if necessary, to stop the usage of M&A as a way to bilk the U.S. government. Moreover, the bond market has been coming under pressure as we move closer to the day the Federal Reserve starts raising interest rates -- something that hasn't happened in eight years -- in response to improving economic data.


You can see this in the volatility that has hit the Barclays High Yield Bond ETF (JNK):

Bottom line

While it's too easy to call the end of the M&A boom, and while there are opportunities on the short side with companies like Sprint, the boom certainly is nearing its end.


As a result, the market's enthusiastic reaction to M&A activity will begin to fade.


More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended S puts to his clients.

12Comments
Aug 7, 2014 1:16PM
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Obama approval rating at 40% and sinking.Keep doing things your way and do not worry about the laws.
Aug 7, 2014 3:23PM
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DOES THIS PISS ANYBODY OFF? the people in the government work for us not the other way around.....
Aug 7, 2014 3:19PM
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"the news could represent a sea change in what has been a major supporter of stock valuations in recent months: the rise of M&A activity to a frantic pace".

 

Uh huh. One of the biggest reasons for the gross overvaluation of stocks: M/A's. Of course, one of the first things that happens is CEO's start talking about 'synergies' and 'core values' and 'deep dive', which essentially means layoffs and fat bonuses for the ones who don't actually do any work; CEO's. F***ers.

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If Obama could ever figure out the these big corporations actually hire people and begin promoting less regulation and less taxation for all he might find out that these companies would stop leaving the US to get away from him and his heavy handed policies and we might even get a few back, and people might start hiring again, wages would go up as would tax revenue. Of course none of this would make sense to someone who has lived his entire life off of charity and govenment checks.
Aug 7, 2014 4:07PM
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                   The Sky "ISN'T FALLING"

           The DOW is "Making an Adjustment"


    From the White House to the Halls of Congress

               and on the Floors of the Senate.

From Wall Street to Main Street the path taken was the

                     "THE WRONG CHOICE" 

 


 


 

 

 



Aug 7, 2014 3:24PM
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sorry the post i just made is about another article. it would not let me post. 
Aug 7, 2014 3:48PM
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Who is the dick, with the "first" comment...Why is he here.....lost..??
Aug 7, 2014 2:53PM
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Dis-incorporation: the dissolution of all entities where the Founder is no longer at the helm or alive. A single responsible person can buy the assets and rights (proof of credit or legitimate cash is required) but no veil of anonymity exists. 
There is no better time to deploy this than right now with over 90 MILLION under and unemployed Americans and a ridiculous number of-- ancient people clinging to jobs because they have no life, and degrees placed in roles they didn't deserve and haven't performed well in (see our economy for validation of that FACT).
Eliminate Boards and shareholders. Do your job or move so somebody else can do it. The games have to go.  
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