Conslidation Crackdown

The deal-making party may soon be over.

Despite merger and acquisition activity setting records both globally and in the United States during the first half of 2021, signs of an antitrust crackdown are starting to emerge. Two recent deals were canceled—one a $30 billion merger that that would have created the world’s largest insurance broker, the other a much smaller, $2 billion energy deal—over concerns they wouldn’t pass regulatory muster with the Department of Justice and the Federal Trade Commission.

The fact that regulators expressed opposition to two deals of such vastly different sizes should give leaders considering a merger or acquisition pause, says Juan Pablo Gonzalez, a Korn Ferry senior client partner and sector leader of the firm’s Professional Services practice. “It sends a message that mergers among companies in the same sector are going to be a lot harder to get through,” he says. Interestingly enough, it also sends a message to employees who are assessing their next career moves. “You can’t assume a deal that might mean layoffs will even happen,” Gonzalez says.

That wasn’t the message being sent—or least heard—in the first half of the year. Through June 30, global M&A activity hit a record high of $2.8 trillion, roughly 20% more than the previous all-time high set in 2007. Deals between US-based companies accounted for nearly half of that total, coming in at $1.3 trillion, also setting a record through the first six months of the year. Several factors contributed to the urge to merge, among them a strong stock market that allowed companies to use their inflated share prices as currency for deals, low interest rates that made borrowing debt for acquisitions attractive, and the desire to lock in deal profits before potential tax rate hikes later this year.

The change in regulatory tone follows the signing of an executive order by President Biden in early July that, among other things, calls for heavier scrutiny of deals, particularly those involving established players buying emerging competitors, a practice that essentially thwarts any threat to their market position. Experts had anticipated a greater focus on antitrust issues in the tech industry when Biden won the election, in part because the success of big tech players during the pandemic prompted fears they would consolidate even more power by acquiring smaller companies that struggled.

Alan Guarino, vice chairman of Korn Ferry’s Board and CEO Services practice, says regulators appear to be applying the decree for tighter oversight more broadly, which could impact potential megadeals in media, transportation, and other industries that have been announced but haven’t received regulatory approval. “Clearly, leaders cannot take securing approval for granted,” he says.

To be sure, Nick Franklin, a Korn Ferry senior client partner who specializes in M&A transactions, says some sectors are more at risk of having deals canceled than others, tech foremost among them. He says that consolidation deals—those that shrink competition within an industry—are likely to have a harder time getting approved than vertical integration deals, which combine companies in the same business but in different areas along the supply chain. “The job of regulators is to protect consumers,” says Franklin, “so deals that shrink competition are going to get more scrutiny.”

The more time it takes to navigate through the review process, the greater the risk for leaders, Franklin adds. For one, it will cost more in terms of financial and legal advice. More importantly, the longer a review lasts, the more uncertainty it creates among shareholders and employees, which could erode the deal’s value by driving down share prices or losing talent who leave for more stable environments.

Against that backdrop, Guarino says leaders considering deals should assume the government is going to reject it and work backward to build their arguments to secure approval. He says they should have the data to support how the combination will enhance competition and build value for consumers and employees, not just investors. Moreover, particularly as it relates to deals involving companies in the same industry, any analysis should include proposals for spinning off or selling assets to win approval.

There is, of course, another option for leaders to grow their companies outside of deals. “Instead of taking a risk on a deal, they could always invest profits in more aggressive approaches for organic growth,” says Guarino.