The two biggest trends of the summer have fallen apart: mergers & acquisitions and tax inversions.
Additionally, Walgreen announced that it would acquire the remaining stake in European pharmacy chain Alliance Boots it doesn’t already own, but as part of the deal the company won’t move its tax base overseas in a tax inversion deal.
These pieces of news represent a drastic and rapid shift in the behaviour of companies in the market. And what’s more, investors are punishing these companies.
Following the news that Fox is pulling its deal for Time Warner, shares of Time Warner are down more than 13%. And shares of both Sprint and T-Mobile are reacting negatively to that deal not coming together, with Sprint falling more than 13% and T-Mobile losing 7%.
Shares of Walgreen are also getting punished, falling more than 12% after the announcement.
In the first half of 2014, total proposed merger volume was running at a roughly $US1.5 trillion annualized pace, the highest since 2007. Following Fox’s offer for Time Warner, this chart showing Rupert Murdoch’s last three big acquisitions made the rounds, showing Murdoch nailing the last two market tops.
And while this chart is a facile illustration of Murdoch’s acquisitions against the stock market, the reaction gave us an interesting window into the psychological state of the market.
Walgreen’s announcement that it wouldn’t execute a tax inversion, a controversial but legal manoeuvre that has seen companies acquire foreign companies and move their tax base to avoid paying U.S. taxes on foreign sales, also signals a change in corporate behaviour.
Walgreen’s announcement follows news on Tuesday that the Obama administration is reviewing possible actions to stem the tide of companies shifting their tax base overseas.
In addition to commentary out of the White House, tax inversions have drawn the ire of other commentators ranging from Mark Cuban to Stephen Colbert, but this chart from Goldman Sachs shows that rhetoric hasn’t really stopped companies from trying these deals. Until now, it seems.
Last week saw the S&P 500 endured its worst week in two years, dropping more than 2%. And while the benchmark index is still less than 5% off its most recent highs, many are wondering if the market is getting ready for a long-anticipated correction.
On Monday, we highlighted commentary from Jonathan Krinsky of MKM Partners who wrote that for the last year and a half, the market has been effectively “crying wolf” at every small decline by quickly recovering any losses and again moving higher.
Krinsky said that now, the wolf may finally be coming.
In an environment where investors seem to be looking for an excuse to sell stocks, the breakdown of two powerful corporate trends might be enough to really spook the market.
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