(Refiling for wider distribution)
By Philip Scipio and Shankar Ramakrishnan
NEW YORK, Sept 16 (IFR) - Bayer will be hoping that its US$66bn purchase of Monsanto won’t succumb to the same failure that has tripped up many other mergers and acquisitions this year, as regulators across the globe increase the scrutiny of deals.
The value of broken M&A transactions has spiked to US$682bn so far this year and is on track to break the record set in 2007 when deals valued at US$923bn fell apart, according to Thomson Reuters.
The number of deals that have collapsed this year stands at 708 through to September 15, outpacing each of the last five years and rivalling the period between 2008 and 2010 when financing markets seized up.
Bernstein Research analysts put the likelihood of the Bayer deal clearing regulatory hurdles at only 50%. Others are even less optimistic as US legislators set up a hearing to dissect the deal. Banks fear the hearings are designed to send a message to regulators to block the transaction.
“The increased politicization of M&A activity - and the fact that this activity has become a hot topic in Congress and campaign trails in more recent times - has to seep into minds of regulators while they look at these transactions,” said the head of M&A at a European bank.
Still, as the proposed Bayer-Monsanto tie-up makes clear, fear of rejection and the high number of failed deals is not stopping companies from pushing ahead with such controversial transactions.
If anything the reverse may be true, according to bankers involved in many of the transactions that have been snuffed out this year. In markets that are quickly consolidating, companies worry about being left behind.
“People realize that if they don’t do a deal they could be in a bad position in a consolidating industry,” said a global head of M&A at a second European bank. “You have to have the best competitive position or you won’t have growth going forward. There is a fear of not taking strategic action - that has been the change over the last 18 months.”
Bankers have a reputation for pushing transactions at any cost - a well deserved one, according to one US M&A banker.
“Even if a deal has virtually no chance of succeeding, an M&A banker will not tell a client it is a waste of time,” he said. “That’s not the role of an M&A banker. We are increasingly hesitant to give advice on legal matters.”
But more recently it has been companies themselves driving the transactions that have drawn the attention of regulators - so say bankers, at least. The corporates’ own lawyers have given the green light on transactions that markets bet against.
Among the biggest deals to fall apart this year were: Office Depot-Staples, Baker Hughes-Halliburton, Allergan-Pfizer, and Norfolk Southern-Canadian Pacific Railways. Many of the deals drew objections from the Department of Justice and US Treasury.
Bankers are also advising clients to lock in financing and frequently that means quickly converting bridge loans to bonds. That’s complicated for deals that the market perceives as at risk of not closing. But there has been no shortage of investors willing to take their chances.
Pre-funding M&A deals through the red-hot US dollar bond markets has made sense from the standpoints of both issuer and investor.
Indeed, investors have been drawn to the large issuance sizes of bonds used to back the mega-acquisitions of the past few years. Large deal sizes made bonds more liquid and they offered better yields.
Now, though, some investors are beginning to grow weary.
“The investor base is much more sensitive to acquisitions being postponed or shut down,” said Tim Doubek, a senior portfolio manager at Columbia Threadneedle. “In any sector where you have a limited number of players, people should be more worried about deals not going through.”
If bond prices rise, investors risk losing if the deal doesn’t go through and the bonds are bought back at 101, he said.
For many companies, on the other hand, the cost of issuing bonds in a low rate environment - even if they have to buy them back if an M&A transaction collapses - is not prohibitive enough to not take financing risk off the table by pre-funding deals.
“Companies are not going to stop prefunding transactions. It eliminates a key financing risk even after the cost of redeeming bonds if the acquisition fails,” said the head of M&A at the first European bank.
“The redemption cost in the context of a busted deal is viewed as relatively low-cost insurance even for a buyer with regulatory risk,” he said. “It is not a lot of money if you are talking about a US$100m cost in a US$10bn financing for redeeming bonds.”
An M&A attorney who has advised on some of the largest transaction to fail this year agreed that the upside of locking in finances outweighs the downside of a buyback.
“It is a disaster if you need a lot of money to buy a company and you can’t get it,” he said. “The exposure on these deals if you are required to close but can’t because you don’t have the money is in the billions. That risk probably outweighs negative arbitrage, prepayment penalty and everything else.”
But fees for calling back bonds on top of hefty break-up fees begin to add up. Bayer has agreed to pay Monsanto US$2bn if the deal collapses.
“Some of these broken deals saw companies losing a billion dollars and that is not chump change, so it does surprise me that people think it is not such a big loss after all,” said one senior syndicate banker. (Reporting By Philip Scipio and Shankar Ramakrishnan; editing by Gareth Gore and Matthew Davies)