Concern over transactions boom after fraught day on Wall Street

Tuesday, August 5th, 2014 is likely to go down as one of the darker days in the history of Wall Street’s mergers and acquisitions market.

In the space of a few fraught hours, deals worth more than $100 billion collapsed, sparking concern about the sustainability of a transaction boom that has gathered pace since the start of the year.

First to go down was 21st Century Fox's $71 billion attempt to buy Time Warner. The media company controlled by Rupert Murdoch blamed the death of the deal on Time Warner's failure "to explore an offer which was highly compelling".

The announcement, coming just three weeks after Mr Murdoch made public his interest, brought an abrupt end to a takeover battle that many had expected to last months.

Within minutes of the news breaking, theories as to what had “really” caused the hard- charging media baron to walk away were flying. Investors, too, were ill prepared and sent shares in Time Warner down 11 per cent in after-hours trading. By contrast, Fox’s shares, which had declined steadily since it made its offer, rose 6.7 per cent.

Two hours later, rumours started to emerge that Sprint, the mobile phone operator controlled by Japanese billionaire Masayoshi Son, had walked away from its own informal bid, reportedly worth about $30 billion, to acquire rival carrier T-Mobile US.

Political resistance In this case, though, the collapse was less a result of bad dialogue than it was of political resistance. In spite of never formally launching an offer, Mr Son has faced staunch opposition from regulators over the antitrust issues arising from a deal that would have merged the US’s third and fourth-largest mobile phone operators.

His patience for that fight finally ebbed during the past few days, ending a hypothetical battle with Washington that has dragged on since late last year. The decision to do so wiped 15 per cent from Sprint’s market value, while shares in T-Mobile US fell 9 per cent.

To further complicate matters, it emerged earlier on Tuesday that T-Mobile US was preparing to formally reject an unsolicited $15 billion bid for part of the company from French mobile phone operator Iliad.

Accompanying these failures, there were sideshows.

Walgreens, the US drugstore chain, is poised on Wednesday to push ahead with its well-trailed $10 billion acquisition for the rest of Alliance Boots, the UK pharmacy that it bought a majority stake in last year.

Crucially, however, the US company is expected not to use the transaction to re-domicile its headquarters to Europe – a strategy known as a tax inversion. By moving away from the US’s high corporate tax rate, Walgreens would have saved billions of dollars. But the company has bowed to intense political rather than investor pressure. Its shares fell 4.2 per cent.

Tax inversions

Not to miss out on the negative news flow for dealmaking, the US Treasury reiterated its dislike of tax inversions, adding to a growing sense on Wall Street that Washington was going to act sooner rather than later to legislate against what has proved a dealmaking catalyst this year.

That so much could turn sour in a single day is unusual but perhaps timely.

The M&A market has soared during the past six months, with the value of deals globally passing $2 trillion in July – the earliest point in the year it has done so since 2007. But even before Tuesday, there were questions about how long such a run would last, with Washington’s revulsion of tax inversions further damping animal spirits.

Yet such are the vicissitudes of the M&A market that news of a fresh mega deal could easily swing sentiment back to positive and help salve the wounds of a traumatic Tuesday on Wall Street. – (Copyright The Financial Times Limited 2014)