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By Andrew C. Arbesman, CFA, CPA
We believe regulatory hurdles for mergers and acquisitions are likely to remain high and even increase in the U.S. and around the world.
2021 was a record year for M&A activity with just over $5 trillion in global volume, exceeding the 2007 record of just under $4 trillion. Robust economic growth, pent-up demand from 2020, open capital markets, and low interest rates encouraged corporates to pursue transformative mergers and acquisitions to accelerate growth. While M&A momentum carried over into 2022, the threat of increased regulatory scrutiny has started to cast a larger shadow globally.
U.S. investors started to hear a new tone out of Washington, DC in mid-2021 after the Aon (AON) and Willis Towers Watson (WTW) merger failed. Both companies mentioned that U.S. regulators’ objections created an unacceptable delay and uncertainty around the merger. The decision by the companies to forgo the merger was considered by many as a win for Biden’s new Department of Justice and served as an example of how the administration could aggressively enforce antitrust laws.
Another failed megadeal followed in February 2022, when Nvidia’s (NVDA) planned $40 billion acquisition of Arm, the British semiconductor manufacturer owned by Softbank (OTCPK:SFTBY), was terminated. The deal, which was first signed in 2020, would have been the largest takeover in history. However, just over a year after the announced transaction, Europe’s competition watchdog launched an in-depth investigation into the merger. The FTC later sued to block Nvidia’s acquisition in December 2021 on the grounds that control of Arm’s chips would give Nvidia a monopoly. The U.K. government shortly followed suit by launching its own competition probe, creating the last bit of red tape needed to effectively kill the deal.
The prospect of more regulatory oversight will likely continue, in our view. The FTC and DOJ have recently completed their call on the public for input on revamping antitrust enforcement laws. In Europe, the EU finalized the Digital Market Act, which looks to curb the influence of big tech companies. Finally, in the U.K., the government has been consulting on giving watchdogs greater control over mergers.
Megadeals and those within certain sectors, such as tech, pharma, and banking, are likely to face more regulatory scrutiny than others. Going forward, companies and the market should be prepared for the FTC, DOJ, and other global competition agencies to take a more aggressive and searching approach when it comes to M&A.
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