Economic reality and antitrust theory paralyse M&A

he best year for M&A happened during Covid as cheap debt and predictable regulation helped buyers see through a gloom that at times felt apocalyptic. (Source: Shutterstock)

The confidence needed to attempt a corporate merger is unusual. It requires, in the buyer’s mind at least, the interlinked beliefs that current conditions are comprehensible and that future ones will improve. It is hard to be sure about either at the moment.

The question of current certainty is, of course, a relative one; there is always change, and M&A activity hardly flinched though big events of recent years — political tension, a global pandemic and wars. The difference now is that regulation and financing are both in flux, too.

Historically cheap debt has been replaced by more expensive borrowing. The price could remain steady or move up or down in the medium term. Few acquirers can be sure which. Meanwhile, competition regulators in the US, Europe and, increasingly the UK, are flexing their powers in ways that test the limits of long-standing antitrust theory.

Putting a number on what this shift means for M&A is tricky: It’s impossible to quantify that which isn’t attempted. But looking at the impact of the news last week that the British antitrust regulator was blocking Microsoft Corp’s $69 billion takeover of video game-maker Activision Blizzard Inc offers some clues. The Competition and Markets Authority’s decision rattled several deals, including Broadcom Inc’s $61 billion takeover of VMware Inc, because it was based on the concerns the regulator has about competition in cloud gaming, a market that is still forming. I described it at the time as a decision that “will come down to the watchdog’s interpretation of how something that hasn’t happened might impact something that it thinks could happen someday.”

For prospective acquirers, that kind of reasoning bodes ill as it challenges companies to prove not only that a merger won’t harm market competitiveness today but that it will be unharmful to what it might be in future. The Federal Trade Commission in the US and the European Commission are also in envelope-pushing mode in blocking Illumina Inc.’s $7 billion acquisition of cancer-testing startup Grail. The deal, a so-called vertical merger in which companies that don’t compete seek to combine, has been stymied over concerns that it would give Illumina too dominant a position in the emerging market for blood-based, early stage cancer testing.

In both situations, there are good reasons for skepticism. Antitrust authorities were hammered as companies like Facebook parent Meta Platforms Inc, Google parent Alphabet Inc and Amazon.com Inc eluded traditional regulation to exert enormous power over consumers. Those regulators are keen to avoid the same mistake by averting dominance, whether in curing cancer or cloud computing, before it takes root.

None of this gives dealmakers a warm fuzzy feeling. In fact, coupled with high interest rates, it becomes a true mood spoiler. The numbers for the year so far show that, even before the regulatory squeeze, M&A was struggling. Global volume fell to $579 billion during the first three months of 2023, the worst start to a year since 2013.

Economists, lawmakers, pundits, executives and almost everyone else have been talking about a recession for so long that it can feel frustrating at times to remember that it hasn’t arrived yet. Whether it does or not, the sentiment that conditions will get worse before they get better isn’t one that typically fosters inessential spending on big-ticket items like whole companies.

Deals can get done in challenging times — the best year for M&A happened during COVID as cheap debt and predictable regulation helped buyers see through a gloom that at times felt apocalyptic. But even with those supportive foundations, there must be belief that things are about to get better. Absent any of that, inertia starts to look attractive.

Too simple an interpretation says that M&A tracks the market and that deals will rebound as soon as stock indexes do. This overlooks dynamics specific to dealmaking. For volumes to return, even if just within a particular sector, one or two companies need to move first, to go big and risk shareholder discontent. Only then does the collective confidence needed to fuel an M&A market begin to build.

It’s not all doom. There are also reasons to believe the M&A downturn could rebound faster than the broader market. Private equity buyers have record amounts of unspent cash, $3.7 trillion at the start of 2023. Shareholders of public companies, meanwhile, have spent a decade becoming more supportive of dealmaking, an attitude spurred by activist investors with their general disdain for corporate inactivity. Meanwhile other fast unfolding themes, such as technological disruption and decarbonisation, will also continue to push companies toward dealmaking as they race to adapt.

But uncertainty is the enemy of decision, and without clarity, whether about rates, regulation or recession, many would-be buyers will simply choose to do nothing.

Ed Hammond is a Bloomberg News reporter who covers mergers and acquisitions. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg