S&P: Trump may spur M&A but antitrust forces will still need to be heeded.
M&A will likely continue apace in 2017 despite the likelihood of higher rates, but especially large companies considering blockbuster transactions shouldn’t expect antitrust efforts to diminish under a more corporate-friendly administration, according to Standard & Poor’s in a recent report.
The rating agency said purchasing growth and responding to changing industry dynamics remain key factors driving M&A. Higher interest rates pose a risk but are unlikely to reduce M&A activity, assuming investors retain an appetite for risk and the economy continues to grow. S&P goes on to say that President Trump’s plans to lower corporate tax rates and require corporates to repatriate cash from abroad also support continuing M&A.
However, antitrust enforcement will be a significant rating risk in 2017, similar to 2016 when M&A was a significant ratings mover, behind only commodity prices.
“Even under a holistically less-stringent regulatory backdrop, antitrust enforcement will likely remain a hindrance to specific large transactions,” S&P said, noting the federal judge’s ruling of Jan. 23 that blocked the Aetna-Humana merger as the latest example. “We expect that some deals blocked or terminated by regulatory concerns will have negative credit implications, particularly if better credit quality was an anticipated outcome of the transaction or the spurned parties subsequently elect to pursue strategies that are detrimental to credit.”
The report says M&A volume reached nearly $1.4 trillion in 2016, down slightly from the year before but still a strong performance. Because of antitrust and other regulation, the big mergers of 2015 were less prevalent last year, S&P said, when transaction value was down by 10% and the number of deals fell by 7%.
“In addition, the number of very large transactions fell last year: there were 20 deals above $10 billion last year, down from 38 in 2015,” S&P said.
Increased pro forma leverage on announced M&A transactions led to several unfavorable rating actions. For example, S&P lowered Halliburton Co.’s long-term rating after it terminated its announced merger with Baker Hughes. It removed Office Depot’s rating from CreditWatch positive after the company’s merger with Staples was blocked, and it downgraded Sysco Corp.’s rating after it ended its merger with US Foods and announced a debt-financed share repurchase program.
S&P noted that the number of merger challenges pursued by the Obama administration was only slightly higher than under the Bush administration, and both pursued significantly fewer than under the Clinton administration.
“A Republican presidency may suggest a shift to looser antitrust regulation, but possibly not much,” S&P said, adding that historically the number of mergers investigated for competitive issues increases with deal size. “Thus, if the deal making landscape continues to be robust and aggressive, antitrust regulation will continue to be an important consideration in the M&A landscape and credit quality.”
Industry sectors where S&P anticipates M&A activity remaining strong or picking up include: building materials, chemicals, consumer products, metals and mining, oil and gas, pharmaceuticals and technology.