SPLS Staples, Inc.

By Dana Mattioli 

After a turbulent year for mergers and acquisitions, some deal makers are giddy about 2017's prospects.

M&A had a big year in 2016, despite resistance from Washington on antitrust and other grounds, showing how strong the urge to consolidate is after a prolonged period of sluggish growth. With the Trump administration and a Republican-led Congress now expected to broadly ease regulation, merger activity could get a big additional boost, deal makers say.

There were $3.7 trillion of takeovers announced globally in 2016, according to Dealogic. While that represents a decline of roughly 15% from 2015's record of $4.4 trillion, it still makes 2016 the third-most-active year for mergers.

In a sign the pace of activity may be quickening, October ranked as the busiest month ever. And while there was a decline in the number megadeals that were 2015's hallmark -- there were 28 transactions valued at $10 billion or more in 2016, compared with 44 the year before -- in the past few months, there have been some blockbusters.

AT&T Inc. in late October agreed to buy Time Warner Inc. for about $85 billion, in the year's largest deal. The announcement followed by a day British American Tobacco PLC's $47 billion bid for the stake of Reynolds American Inc. it didn't already own.

Less than a week later, chip maker Qualcomm Inc. agreed to pay roughly $39 billion for NXP Semiconductors NV. More recently, industrial-gas giants Praxair Inc. and Linde AG on Dec. 20 said that they would merge in a deal that would create a company valued at $67 billion.

"I haven't seen a set of factors that's been more bullish for M&A activity in some time," said Peter Weinberg, a veteran banker and co-founder of Perella Weinberg Partners, which advised on both the AT&T-Time Warner and Praxair-Linde deals.

Mr. Weinberg says tax-law changes, together with low interest rates and increasing CEO confidence, could push deal-making into record territory in 2017.

Another factor bullish deal advisers are banking on is a more accommodating antitrust apparatus. The year just past was the biggest ever in terms of the volume of collapsed deals, with more than half a trillion dollars of previously announced tie-ups withdrawn. While not all of them dissolved because of antitrust issues, deal makers generally view the Obama administration as tough on takeovers.

Among the deals that fell apart because of government scrutiny was Pfizer Inc.'s roughly $150 billion proposed deal for drugmaker Allergan PLC, which ranked as the largest announced union in 2015. It broke apart after the Treasury Department imposed stricter rules on so-called tax inversions -- deals that move the acquiring company abroad to save on taxes -- which helped drive the merger boom in 2015.

Also in 2016, oilfield-service giant Halliburton Co.'s roughly $35 billion proposed combination with Baker Hughes Inc. had to be abandoned because of antitrust pressure, as did Office Depot Inc.'s bid to merge with Staples Inc.

There is no guarantee the new administration will go easier on merger plans, and indeed Donald Trump on the campaign trail took aim at the proposed AT&T-Time Warner combination. What's more, job cuts are often a big part of the rationale for a merger and Mr. Trump has already shown a strong inclination to push back against moves by companies that reduce employment in the U.S.

And even if the government doesn't stand in the way, other factors could -- like a sharper-than-expected rise in interest rates, which would increase the cost of funding deals. A pickup in growth could also take away one major catalyst for deal-making, and give companies more of an incentive to invest in their businesses instead, but mergers have historically increased with economic growth.

One driver of merger activity in 2016 thrown into doubt by the election is China: Companies there struck $67 billion worth of U.S. takeovers in 2016, nearly five times the prior high in 2014, according to Dealogic. Given indications Mr. Trump may take a confrontational approach toward China, deal makers say that activity could slow.

Even without such pressure, China may itself put on the brakes as the government is expected to impose tighter controls on overseas investments.

"We suspect we will see more scrutiny of certain acquisitions of U.S. companies by non-U.S. companies, particularly where security concerns are implicated or U.S. jobs eliminated or expatriated," said Greg Weinberger, co-head of global M&A at Credit Suisse Group AG. Mr. Weinberger advised Enbridge Inc. on its $28 billion deal to buy Spectra Energy Corp. in 2016, and Credit Suisse served as sole banking adviser to Praxair on its deal with Linde.

But other changes are expected to more than make up for any such dampers.

An expected decline in corporate taxes -- including what it costs to repatriate the mountains of cash U.S. companies hold abroad -- is expected to help give chief executives the confidence to strike deals. The last time there was a so-called tax holiday enabling companies to bring back cash from abroad at a lower rate, in 2005, deal volume involving U.S. acquirers surged 34%, according to Dealogic.

"There is no question that a tax holiday will be a stimulus to M&A," said Kurt Simon, global chairman of M&A at J.P. Morgan Chase & Co., who advised on deals including Yahoo Inc.'s pending sale to Verizon Communications Inc.

Clients are already starting to earmark some of the cash they expect to bring back for M&A, bankers say. In a sign of the changing times, deal lawyers say they are even fielding queries from clients who had moved overseas through inversions about how to potentially come back to the U.S. if tax rates become more competitive here.

Write to Dana Mattioli at dana.mattioli@wsj.com

(END) Dow Jones Newswires

January 03, 2017 02:48 ET (07:48 GMT)

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