The Winds From Washington Chill Wall Street’s Deal Making

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A businessman walks along Wall Street in New York City. A recent divergence in the deal market, with megadeals falling away and small ones remaining as strong as ever, comes largely as a result of a regulatory clampdown. Credit Spencer Platt/Getty Images

On Wall Street, the phones have been a little quieter. The workload has been a little lighter. The happy hours have been starting earlier.

For most people, that would be a good thing. But not for deal-hungry lawyers and bankers, who are experiencing a recent slowdown in megadeals. A series of broken transactions and stock-market volatility have shaken the confidence of some in the boardroom to tackle their next big acquisition.

The value of abandoned deals has been higher than that of newly signed deals in the United States so far this year. Almost $340 billion worth of mergers have been withdrawn in 2016, while $282 billion worth of newly signed deals were announced, according to data compiled by Dealogic. The cancellations are skewed toward megadeals, defined as those worth $10 billion or more.

Of the 26 deals pulled so far this year, including Pfizer’s $152 billion combination with Allergan, the average deal size is $13 billion, according to Dealogic. Another 2,800 deals have been announced, with an average size of $100 million. So the bigger acquisitions are being withdrawn, while the smaller ones are as active as ever.

The divergence in the deal market comes largely as a result of a regulatory clampdown.

Over the last year, with shareholder encouragement, companies ventured into large, complex and risky deals. Last week, the government fought back, in a lawsuit by the Justice Department and new rules from the Treasury Department, to stop many of the transactions.

One lawyer described a depression that set over mergers and acquisitions as a result of those two actions. A banker said that Wall Street had come to a grinding halt. These deal makers requested anonymity, so as not to be seen at odds with the government’s decisions.

During an election year, advisers say, the big, politically unpopular deals may just have to wait.

“Companies were concerned that their large deals would draw political focus and be criticized as part of the campaigning,” Marc-Anthony Hourihan, co-head of Americas mergers and acquisitions at UBS, said.

Robert A. Profusek, who heads Jones Day’s global mergers and acquisitions practice, said, “The gargantuan deals, they’re harder; there’s no question in my mind.”

“The government has been tougher, but they would say: ‘That’s because you guys have been jamming these giant deals at us. What do you expect us to do?’” Mr. Profusek said.

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There is plenty of blame to go around. Bankers and executives would argue that with little global economic growth, mergers have been the best way for companies to jump-start their businesses. Lately, though, they say there has been more uncertainty about what the government will and will not approve, resulting in an abatement in activity.

That has been a concern for months, some say, and last week’s government actions, and subsequent deal terminations, merely provided validation.

President Obama’s statements on April 5 related to deal making caught Wall Street’s attention, and many turned on their televisions to listen. He spoke about “tax loopholes” and “tax breaks for millionaires.” It became clear that the trend of big inversions — or deals that allowed American companies to move their headquarters abroad for tax purposes — could be over.

Advisers gathered their tax experts to sift through the hundreds of pages of new tax rules released by the Treasury so they could guide their clients appropriately. Even though the rules target inversions, many legal experts say their implications will extend further.

The law firm Kirkland & Ellis said in a note on Wednesday, “The proposed regulations are so far-reaching that, if finalized in their current form, they likely will affect the way every multinational corporate group with a U.S. presence does business.”

The firm was referring to new rules regarding so-called earnings stripping, in which an American subsidiary borrows from its foreign parent and uses interest costs from the loan to help shrink its United States tax bill.

The drug makers Pfizer and Allergan called off their merger as a result of the new rules, which also essentially disqualified Allergan as a merger partner for Pfizer because it had made a few too many inversions.

That day, the Justice Department filed a lawsuit against the combination of Halliburton and Baker Hughes, saying the $35 billion merger would harm competition in the oil field services industry.

Some deals have been withdrawn before they really got off the ground because of concerns about government scrutiny. In February, United Technologies rebuffed Honeywell’s $90 billion takeover bid in a public dispute surrounding the viability of combining two large industrial conglomerates without antitrust obstacles. Canadian Pacific backed away this week from its pursuit of a fellow railway operator, Norfolk Southern, after the government criticized part of its plan.

But ever-optimistic bankers say there is opportunity to be had in all of this. After Pfizer’s and Allergan’s deal was terminated, pharmaceutical stocks rallied as investors speculated which companies would become the next targets. And the factors that led to such rampant deal making last year — slower growth and cheap financing — have not gone away.

It just may be the smaller companies that feel more confident in pulling the trigger.

“I wouldn’t call it a day yet on the M.&A. wave,” said Mr. Profusek of Jones Day.

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