The first major takeover battle in years is reaching a climax. While campaigning in Pittsburgh earlier this month, Democratic presidential candidate Kamala Harris said U.S. Steel should be American-owned and run, echoing sentiments expressed earlier this year by President Joe Biden and Republican rival Donald Trump. The speech prompted a counterattack from the steelmaker, which had agreed to a $15 billion takeover by Japanese rival Nippon Steel. The company said its employees were not only rallying in support of the deal but would also consider layoffs and moving its headquarters out of Pittsburgh if the deal fell through. Biden is expected to block the deal soon, bringing an end to the pantomime that has kept lawyers, bankers and lobbyists busy all year. U.S. Steel’s stock price has plummeted (see Figure 1).
Premium This is not the only megamerger that has hit a snag. In May, mining giant BHP called off its bid for Anglo American after the latter’s plans to sell its South African operations sparked political turmoil. Rival BBVA’s hostile bid for Spanish bank Sabadell is exciting European financial circles but is being toyed with by local politics. This week a court in Portland, Oregon, considered arguments by the Federal Trade Commission that a merger between two US grocers, Albertsons and Kroger, should be blocked because it would lead to higher prices. A Canadian bidder’s bid to buy Japanese retailer Seven & I is in jeopardy after its first offer was rejected.
Companies are cautiously returning to the negotiating table after a deal slump that began after central banks raised interest rates in 2022. The value of announced mergers and acquisitions globally is still 17% below the 10-year average for this time of year, but that’s an improvement from being 29% below the average for the same period last year.
Many of the conditions for a wave of mega-mergers are now in place. Stock markets are booming and target prices are soaring, a trend that often heralds a wave of mega-deals. Corporate balance sheets are stockpiling cash, and the spread between corporate and government bond yields is narrowing, making borrowing to fund deals more attractive. At the same time, other uses of corporate profits are less attractive than they were a year ago. Buybacks of overvalued shares make them worthless to long-term investors, who are also unenthusiastic about the idea of companies paying down their debt. This is a sign that the huge amount of capital pumped into private equity funds has yet to be deployed in takeover deals.
Investment bankers who had been hibernating in a state of “cautious optimism” are now expecting a lot of megadeals. Judging by the soaring share prices of investment banks such as PJT and Evercore, which often advise the biggest deals, many investors believe it. And in one sector the prophecy has come true. In October 2023, ExxonMobil agreed to buy hydraulic fracturing giant Pioneer for $65 billion. A few days later, Chevron agreed to buy another independent producer, Hess, for $60 billion. The wave of consolidation among American oil companies has continued apace since. Analysts are betting that demand for “green” metals such as copper means that mining companies will soon be caught in a similarly frenetic spirit after years of balance sheet discipline. Other commonly discussed targets include distressed and undervalued British stock market-listed companies and Japanese companies undergoing market-oriented governance reforms.
But the string of failed deals bodes better than what’s happening in the oil sector. In the US, the economic slowdown and election uncertainty threaten to drive a wedge between buyers and sellers. And a longer-term view reveals a more deeply rooted malaise. Corporate profits and valuations have soared over the past two decades, but the number of megadeals has not. For example, since 2004, the number of publicly listed US and European companies with market capitalizations of more than $10 billion has more than doubled. But the share of global deals over $10 billion in deal value has remained largely unchanged at just one in five (see Figure 2). Despite the rapid growth of private markets in recent years, the largest buyouts in history occurred before the 2007-09 global financial crisis.
What kills megadeals? One theory is that managers learn from past value-destroying adventures. A literature review by Cambridge University’s Jeff Meeks and J. Gay Meeks found that only one in five studies conclude that the average deal generates higher total profits or increases acquirer shareholder wealth. AOL’s $165 billion acquisition of Time Warner in 2001 is taught to business school students as the epitome of dealmaking hubris. In 2007, the American utility TXU was acquired in the largest leveraged buyout in history, but filed for bankruptcy less than seven years later.
But this explanation underestimates the financial rewards that executives get from running a giant company and overestimates the time they spend studying the past. Some executives decide they are destined to repeat the mistakes of their predecessors, or at least that the best way to correct them is to close even more deals. Warner Bros. Discovery, the American media giant formed in April 2022 by the merger of Discovery and WarnerMedia, the successor to Time Warner, is already rumored to be considering dissolution. On September 5, Verizon, the telecommunications giant that shares a common ancestor with AT&T, the former owner of WarnerMedia, announced that it would pay $20 billion for Frontier, acquiring assets it had only just sold in 2016.
A better explanation is that companies that aspire to build empires are now viewed with more skepticism by investors than they used to. The sprawling global conglomerate is completely outdated. Industrial icon General Electric completed its demerger into three separate companies earlier this year. Vodafone, which made the biggest acquisition in history when it bought Mannesmann in 2000, is now meekly selling off the business. The technology companies that have replaced financial, industrial, and telecommunications empires as the world’s most valuable companies have not shown the same willingness to risk their businesses on big, adventurous alliances. The big technology companies’ most significant deal moves today are relatively small investments in artificial intelligence startups.
Another, even more powerful brake on megadeals is politics. Suspicion of big business across the political spectrum makes antitrust thinking more radical and unpredictable. Even if a company wins a legal battle with regulators, as Microsoft did with Activision for $69 billion, the long period of uncertainty between signing and closing makes it less likely to pursue big deals. Microsoft’s acquisition of the video-game developer took nearly 21 months. The Kroger-Albertsons partnership is about to reach its two-year anniversary without ever being completed.
Barriers for cross-border deals are also rising. National security poses as much of a threat to such mergers as antitrust concerns. The U.S. investment watchdog, the Committee on Foreign Investment in the United States (CFIUS), has grown in size and rigor in recent years. Similar rules have proliferated around the world, and dealmakers must navigate a patchwork of expanding national security definitions and rules.
In this respect, Nippon Steel’s attempted acquisition of U.S. Steel marks a milestone. The national security rationale for blocking a Japanese competitor from buying a steelmaker is flimsy, and opposition to the acquisition has more to do with the company’s presence in the key battleground state of Pennsylvania. Executives will have little reason to believe that future acquisitions will be treated with any more objective regard, and therefore will be in less of a rush to write checks.
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