While the surge in Q1 market volatility has had a dramatic impact on asset prices, and led to some unprecedented central bank interventions to stabilize markets, one product that has seen a dramatic hit and has yet to rebound, is M&A.
According to BofA, North American M&A volumes declined again in March, falling to $107bn from $140bn in February, $157bn in January and the recent peak of $410bn in November of last year.
The implication of the above is that investment banking revenues from M&A advisory work, which had been steadily rising over the past two years, are about to see a sharp decline. And, after a year which saw a record $5 trillion in global M&A, this will be a bitter pill to swallow for the banking community. The top M&A deals of 2015 are shown below.
However, that may be just the beginning of bankers' headaches.
It is no secret that over the past several years, one of the primary drivers behind M&A activity was tax inversions, which however as yesterday's striking announcement by the US Treasury made clear, are now effectively over, and with them goes much of the impetus for companies to merge.
And while the Pfizer-Allergan $160 billion merger may be the most notable casualty of the Treasury's decree, there are various other deals working on corporate inversion deals or who have carried out inversions in the past. They are shown in the list below, courtesy of Bloomberg:
Progressive Waste-Waste Connections
Texas-based Waste Connections Inc. agreed to buy fellow garbage-hauling company Progressive Waste Solutions Ltd. in January, and announced plans to move its tax domicile to Canada. The new company would have an effective tax rate of about 27 percent, down from the 40 percent rate that Waste Connections pays now, it said in a statement at the time.
The proposed regulations would have an impact of less than 3 percent of the new company’s adjusted free cash flow, which is expected to be more than $625 million, the companies said in a joint statement Tuesday. “The two companies remain committed to the strategic merger.”
Waste Connections shares fell as much as 7.2 percent. Progressive Waste dropped 9.3 percent.
Terex-Konecranes
Terex Corp., a U.S. crane and construction-machinery maker, agreed to combine with Finnish competitor Konecranes Oyj last year to create a group with a combined $10 billion in sales, incorporated in Finland.
While the companies described the transaction as a merger of equals, Terex stockholders would own 60 percent of the combined business.
Since then, China’s Zoomlion Heavy Industry Science & Technology Co. has made a counteroffer for Terex. Still, with the U.S. closely scrutinizing deals that put American technology into Chinese hands, that deal would have its own regulatory hurdles.Terex shares closed 2.3 percent down in New York.
Johnson Controls-Tyco
Auto-parts maker Johnson Controls Inc.’s planned merger with Ireland-based Tyco International Plc was targeted by Hillary Clinton’s campaign ads. Clinton called the plan to move Johnson Controls’s address to tax-friendly Cork “an outrage.”
Tyco itself got a foreign tax address in the late 1990s through an inversion, as part of a takeover of the security company ADT, which was incorporated in Bermuda. Tax inversions seem to be one of the few things the presidential candidates can agree on, with Bernie Sanders, Donald Trump and Clinton all targeting the practice in their campaigns.
Tyco shares declined 3 percent in New York. Johnson Controls fell 2.2 percent.
Mylan-Meda
Drugmaker Mylan NV said Tuesday it’s “comfortable moving forward” with a $7.2 billion deal to buy Sweden’s Meda AB, in response to concerns about the impact of Treasury rules.
Mylan moved its headquarters from Pittsburgh to the Netherlands in 2015 after buying Abbott Laboratories’ generic drug business in overseas markets like Europe. In February this year, the company agreed to buy Meda.
Mylan shares fell 2.8 percent in Nasdaq trading while Meda declined 1 percent in Stockholm.
IHS-Markit
IHS Inc., which provides data analysis, agreed to buy London-based Markit Ltd. for about $5.5 billion last month with plans to relocate to the U.K. The Englewood, Colorado-based company and Markit said in a regulatory filing Tuesday that they don’t expect the merger to be subject to the new rules.
“Based on our preliminary review at this time, we also believe that the other U.S. Treasury rule changes will not impact the combined company’s adjusted effective tax rate guidance of a low to mid-twenties percentage range.”
IHS shares declined 2.6 percent in New York Stock Exchange trading while Markit declined 2.6 percent.
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It remains to be seen how much of a hit on the future M&A backlog the Treasury's announcement will have, but even if banks suffer a drop in revenue, there is one silver lining: tens if not hundreds of thousands of workers who would have been otherwise "synergized" aka laid off as part of the merger process, will keep their jobs that much longer, because instead of boosting shareholder equity and requiring the cutting of overhead to accomodate the new debt, many of the companies that would have otherwise merged will continue as standalone entities. As such they will need all the support they can get.
The chart below shows the combined employees of the top 10 M&A deals of 2015, and what our estimate is of the combined layoffs between them.