After Hitting Record High In 2015, M&A Activity Declines Sharply In The First Quarter

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Includes: DIA, QQQ, SPY
by: Financial Sense

By FS Staff

After hitting a new record high last year, mergers and acquisitions fell sharply for the first quarter of 2016.

Click to enlarge
Source: Bloomberg

M&A activity tends to follow the movements of the stock market and overall economy. When times are good M&As increase, putting in a final exuberant peak just as the stock market reaches all-time highs. With recent efforts by the Obama administration to curb corporate mergers and eliminate tax inversions, there's a decent chance that M&A activity won't be returning back to 2015 levels anytime soon.

Consider Obama administration takes aim at corporate mergers, inversions

The Obama administration is increasingly taking aim at corporate mergers as the bustling market pumps out deals at a record pace, placing business titans at odds with Washington amid swirling political angst...

The action has fueled tension between U.S. corporations that believe the government doesn't adequately grasp economic factors and political leaders who say companies are taking advantage of tax loopholes and vulnerable consumers.

This week alone, the Treasury Department cratered pharmaceutical giant Pfizer's $160 billion tax inversion deal with Allergan, and the Justice Department filed a lawsuit seeking to block No. 1 oilfield services firm Halliburton's $34 billion acquisition of No. 3 firm Baker Hughes.

Meanwhile, the Federal Trade Commission has challenged the merger of Staples and Office Depot, and officials are closely scrutinizing a litany of other deals, including the health care insurance merger of Aetna and Humana, the insurance merger of Anthem and Cigna, and beer giant Anheuser-Busch InBev's acquisition of SABMiller.

Taken together, these cases suggest a new measure of confidence on behalf of the Obama administration that it retains the legal and political leverage to prevent corporate tie-ups when competition is threatened.

"The signal to business is if you do anything the administration doesn't like, it will find a way to stop you," said University of Michigan business and law professor Erik Gordon, an expert on mergers. "You've got to plan your business around what will be OK with them."

It also comes amid pressure from several presidential contenders, including Democrats Hillary Clinton and Bernie Sanders and Republican Donald Trump, to put a stop to inversions, which allow companies to find a foreign suitor of a specific size and switch their headquarters to dodge taxes.

"The agencies are much more aggressive and willing to challenge the deals and not willing to accept the traditional way of curing the problem," said David Balto, a former FTC policy director and a consumer advocate. "It is clear that the standards are changing and it's long overdue. We need a much tougher cop on the beat. Consumers are being harmed with all these mergers."

As of Wednesday, more than $415 billion in corporate deals had been withdrawn globally so far in 2016. That tops the $303 billion in global deals scrapped during the same time period in 2007, the peak year for canceled transactions, according to data from S&P Global Market Intelligence.

Based on the current year's pace, 2016 "could be the biggest year, possibly, for canceled deals since the start of the great recession," said Richard Peterson, a senior director at S&P Global Market Intelligence...

Here is another chart of M&A transaction values (this time looking at monthly data) in comparison to the S&P 500. As you can see, M&A activity and the stock market tend to move together over time.

Click to enlarge
Source: Bloomberg