By Liana B. Baker and Pamela Barbaglia
NEW YORK/LONDON (Reuters) - Global mergers and acquisitions dropped to $783 billion (598.4 billion pounds) in the third quarter, down 35 percent from the prior quarter, as the escalating trade dispute between the United States and China cast a shadow on the financial and regulatory prospects of some deals.
U.S. chip maker Qualcomm Inc (O:QCOM) pulled its planned $44 billion acquisition of NXP Semiconductors NV (O:NXPI) in July after China delayed offering antitrust clearance, a move seen as retaliatory to the trade tariffs announced by the United States.
This has cast uncertainty on the prospects of other deals involving global companies that require Chinese regulatory approval, including aerospace supplier United Technologies Corp's (N:UTX) $23 billion acquisition of Rockwell Collins Inc (N:COL).
"We've got some clouds on the horizon, vis a vis a trade skirmish, or potentially a trade war with China. You have the potential for a hard Brexit and we've got rising rates," said Mark Shafir, Citigroup Inc's (N:C) global co-head of M&A.
The number of global announced deals hit its lowest level since 2013, at about 9,135, and global deal volume was down 6 percent compared with a year ago. To be sure, dealmaking activity has remained stronger than average and the first nine months of 2018 saw global dealmaking reach a new record of $3.2 trillion.
U.S. M&A, which rose 14 percent year-over-year to $368.1 billion in the quarter, fared better than other regions. Announced deals in Europe fell 14 percent to $151.4 billion while M&A in Asia-Pacific was down 38 percent to $185.1 billion, the Thomson Reuters data showed.
Among the third quarter's biggest announced deals were chipmaker Broadcom Inc's (O:AVGO) $18 billion acquisition of software maker CA Inc (O:CA), and Dell Technologies Inc's (N:DVMT) proposal to pay $21.7 billion in cash and stock to buy back securities related to its stake in software company VMware Inc (N:VMW).
In August, dealmakers had been chasing potentially the largest buyout of all time, after billionaire Elon Musk tweeted that he had the funding secured to take electric car maker, Tesla Motors Inc (O:TSLA) private, valuing the company at $72 billion.
Musk had said he had held early talks about the buyout with Saudi Arabia's Public Investment Fund, a move that highlighted the growing importance in alternative pools of capital around the world, from sovereign wealth funds to pension funds. Musk decided to scrap the plan and was sued on Thursday by the U.S. Securities and Exchange Commission over his tweets. [nL2N1WD1RB]
Hernan Cristerna, co-head of global M&A at JPMorgan (NYSE:JPM), said he believes companies will gradually shy away from megadeals but remain active in midsize ones, despite the uncertain environment
"Going forward it will be hard to sustain the number of $10 billion-plus deals," Cristerna said. "Next year we will see fewer transformational moves but there will be a large amount of activity in the $3 to $5 billion deal range because companies see the logic of doing M&A and are conscious of the difficulties and risks of going through a big transaction."
Dealmakers said that regulatory risk remains a concern across the globe.
"Antitrust reviews are more difficult to predict,"said Alexandra Soto, Lazard Ltd's (N:LAZ) chief operating officerof financial advisory in Europe.
Dealmakers also said they are preparing for an acquisition spree by Japanese companies, following the country's biggest-ever outbound deal this year, Takeda Pharmaceutical's (T:4502) 45.3 billion pound agreement to buy London-listed drugmaker Shire Plc (L:SHP). "Many Japanese companies have access to substantial capital and they are using it to drive M&A growth outside of Japan," Morgan Stanley's (N:MS) head of Americas M&A, Tom Miles. "We expect Japanese companies to continue outbound M&A at a strong pace."
Tens of billions of dollars in tariffs by the United States and China have not dented the rise of most stock markets in the Western world, and dealmakers said they did not see the economic calculus changing among corporate acquirers.
"In some sectors where it creates clear uncertainty, companies are factoring it into their thinking. We have not seen uncertainty around tariffs be a major impediment to M&A so far," Morgan Stanley's Miles added.