Why M&A Is Back, for Now

What's behind the new urge to merge? The November election, for starters

by Ben Steverman

Despite a credit crunch and recession worries, the dealmakers have returned to Wall Street.

Their current run includes Microsoft's (MSFT) $44 billion bid for Yahoo! (YHOO). Major U.S. air carriers are reportedly talking about mega-mergers. And a wave of smaller deals has hit the headlines, including Reed Elsevier's (RUK) $4 billion buyout of ChoicePoint (CPS).

So far it's a pale imitation of 2007, when private equity firms used cheap credit to gobble up company after company. That pumped up the stock market in the first half of the year, just before the credit crunch took it down again.

Fears of a Coming Antitrust Crackdown

The credit crisis still drags on, and private equity players sit on the sidelines, unable to obtain financing for billion-dollar deals. So what's behind this encore performance of the M&A boom? And how long can its run last if the economy continues to deteriorate?

One factor is the Presidential election. The next U.S. President will appoint regulators who can decide whether to challenge deals on antitrust grounds. They will determine whether a proposed combination would restrict competition or create a monopoly. Some deals are being rushed to get them approved before President George W. Bush leaves office on Jan. 20, 2009.

Most deals ultimately get approved, but the process can create a headache for CEOs and shareholders. On Feb. 19, the proposed merger between XM Satellite Radio (XMSR) and Sirius Satellite Radio (SIRI) hit its one-year anniversary as the controversial deal still waits for word from the Justice Dept.'s Antitrust Div.

Obama Has Criticized Bush's Antitrust Record

All else being equal, most assume a Democrat in the White House will be more suspicious of proposed mergers. But it's hard to know what the next President will do. Antitrust regulation is the sort of topic that makes voters' eyes glaze over, so it rarely gets attention on the campaign trail.

Senator Barack Obama (D-Ill.) was the only current candidate to respond to a questionnaire from the American Antitrust Institute last year. Obama criticized the Bush Administration for "the weakest record of antitrust enforcement of any administration in the last half century." He pledged to "reinvigorate" enforcement, and cited health care, including the insurance and pharmaceutical industries, as a sector where the lack of competition has raised prices for consumers.

Delta Air Lines (DAL), Northwest Airlines (NWA), Continental Airlines (CAL), and United Airlines (UAUA) are among the carriers said to be discussing mergers. Airline deals have gotten close scrutiny from regulators in the past, and that's likely to happen again. On Feb. 14, Senator Hillary Clinton (D-N.Y.) said the mergers should prompt "a hard look at the potential effects on workers" before they're approved.

Federal Judges Have the Ultimate Say

Antitrust law is full of "squishy language that reasonable people can disagree on," says Robert Lande, a University of Baltimore law professor who co-founded the American Antitrust Institute. While all regulators may worry that a merger would raise prices, Democrats are more likely to consider other factors, such as whether a merger would restrict consumer choices, Lande says. That approach could threaten mergers of media companies, for example, under an Obama or Clinton Administration.

Still, many argue antitrust policy won't change much even if Democrats take the White House. For one thing, political appointees don't make ultimate decisions on mergers—federal judges with lifetime appointments do.

Also, a new Administration may affect "close cases," but there is a consensus on most questions, says antitrust expert Paul Denis, now at the law firm Dechert LLP. As a Justice Dept. lawyer in the early 1990s, he helped draft merger guidelines still in place today. The political parties may be split on many other important issues, but antitrust "is an issue where there is probably more agreement than disagreement," Denis says.