Is the era of the mega-deal over?

It is not the only mega-merger to hit the rocks. In May BHP, a commodity giant, ended its pursuit of Anglo American after its plan to divest Anglo’s South African operations caused a political storm. A hostile bid for Sabadell, a Spanish bank, by BBVA, a bigger rival, has Europe’s financiers humming with excitement but has become mired in local politics. This week a court in Portland, Oregon, considered arguments from the Federal Trade Commission about why the merger of Albertsons and Kroger, two American grocers, would raise prices and should be blocked. In Japan, typically a haven from aggressive corporate conquests, retailer Seven & i has rebuffed an offer from a Canadian suitor, halting what would be the largest-ever foreign takeover of a Japanese company.

It is an odd time for big deals to be falling apart, because bosses and financiers have been getting more optimistic. Companies have been tentatively returning to the negotiating table after a dealmaking drought that began when central banks raised interest rates in 2022. The value of mergers and acquisitions announced globally is still 17% below the ten-year average for this time of year, but that is up from 29% below the equivalent average last year.

In fact, many of the conditions for a mega-merger wave are in place. Stockmarkets have boomed, and though that makes targets for acquisition pricier, such bullishness often presages a wave of big transactions. Company balance-sheets are stocked with cash and and the spread between the yields on corporate and Treasury bonds has narrowed, making borrowing to fund deals more attractive. At the same time, other uses for firms’ profits are less appealing than they were a year ago: repurchasing overvalued shares destroys value for long-term investors, who are also unenthused by the idea of firms paying down debt. That is to say nothing of the buckets of capital committed to private-equity funds yet to be deployed in buy-out deals.

Investment bankers, who had been hibernating in a state of “cautious optimism", now expect lots of big deals. Judging by the soaring share prices of investment banks such as PJT and Evercore, which often advise on the biggest transactions, it is a pitch that many investors believe. And in one sector the prophecy has come true. In October 2023 ExxonMobil agreed a $65bn deal to buy Pioneer, a fracking giant. Days later, Chevron agreed to purchase Hess, another independent producer, for $60bn. The wave of consolidation among American oil firms has since continued apace. Analysts wager that demand for “green" metals such as copper mean miners could soon be gripped by similarly frenzied spirits after years of balance-sheet discipline. Other oft-discussed targets include firms listed on Britain’s ailing and undervalued stockmarket, and Japanese companies undergoing pro-market governance reforms.

The string of failed deals, however, is a better bellwether than what is happening in the oil sector. A slowing economy and election uncertainty in America threaten to drive a wedge between buyers and sellers. And taking a longer view reveals a deeper malaise. Although firms’ profits and valuations have shot up over the past two decades, the number of big transactions has not. Since 2004, for instance, the number of listed American and European firms worth more than $10bn has more than doubled. But global transactions worth more than $10bn have barely budged as a share of the value of deals, at a fifth (see chart 2). Despite the breakneck growth of private markets in recent years, the largest ever buy-outs predate the global financial crisis of 2007-09.

What has killed the mega-deal? One theory is that executives have learned from previous value-obliterating adventures. According to a literature review by Geoff and J. Gay Meeks of Cambridge University only a fifth of studies conclude that the average deal produces higher combined profits or increases the wealth of the acquirer’s shareholders. The purchase of Time Warner for a jawdropping $165bn by AOL, an internet firm pumped up by the dotcom bubble, in 2001 is taught to business school students as an example of hubristic dealmaking par excellence. In 2007 TXU, an American utility firm, was gobbled up in the largest-ever leveraged buy-out, but filed for bankruptcy less than seven years later.

This explanation underestimates the financial rewards bosses reap from running giant firms, however, and overestimates how much time they spend studying the past. Some executives are destined to repeat the mistakes of their predecessors, or at least decide that the best way of correcting them is to strike even more deals. Warner Bros Discovery, an American media giant formed in April 2022 through the merger of Discovery and WarnerMedia, the heir to Time Warner, is already rumoured to be mulling a breakup. On September 5th Verizon, a telecoms giant which shares a common corporate ancestry with AT&T, WarnerMedia’s previous owner, said it would pay $20bn for Frontier, acquiring assets it sold only in 2016.

A better explanation is that would-be empire builders face more scepticism from investors than they did in the past. Sprawling global conglomerates are thoroughly unfashionable. General Electric, an industrial icon, completed a split into three separate companies earlier this year. Vodafone, which pulled off another of the largest takeovers in history when it acquired Mannesmann in 2000, is today meekly selling off its operations. The technology firms that have replaced the financial, industrial and communications empires as the world’s most valuable companies have not shown the same willingness to risk their business on big, adventurous tie-ups. Big tech’s most important dealmaking moves today involve comparatively small investments in artificial-intelligence startups.

Another, even more potent, brake on mega-deals is politics. Suspicion of big companies across the political spectrum has led to more radical and less predictable thinking on antitrust. Even when firms do prevail in legal scuffles with regulators, as Microsoft did in its $69bn acquisition of Activision, they face lengthy periods of uncertainty between signing and completing transactions, making them less likely to pursue deals in the first place. Microsoft’s acquisition of the video-game developer took nearly 21 months. The tie-up between Kroger and Albertsons will soon commiserate its second birthday without completing.

The bar for cross-border deals has also gone up. National security is at least as potent a threat to such mergers as antitrust worries. The Committee on Foreign Investment in the United States (CFIUS), America’s inbound investment watchdog, has grown bigger and tougher in recent years. Similar rules have proliferated globally, meaning dealmakers must navigate an expanding definition of national security and patchwork of regulations.

Nippon’s attempt to buy US Steel marks a watershed moment in this regard. The national-security rationale for blocking the acquisition of the steelmaker by a competitor from Japan is flimsy, and opposition to the deal has more to do with its presence in Pennsylvania, a key swing state. Bosses will have few reasons to think that future dealmaking will be treated more objectively. And so fewer of them will be rushing to get their cheque-books out.

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