Obama Regulators Take Hard Line On Tech M&A

Bankers, lawyers and shareholders accustomed to hearing ka-ching from mergers and acquisition activity are instead getting used to the sound of deals being flushed down the toilet.

Applied Materials (AMAT) on Monday scrapped its takeover bid for Tokyo Electron, just days after Comcast (CMCSA) pulled the plug on its proposed acquisition of Time Warner Cable (TWC). Applied Materials and Japan's Tokyo Electron, makers of chip equipment, said they were unable to allay the Justice Department's objections, despite proposing pro-competition remedies.

Applied Materials stock fell 8.4% to 19.97, a six-month low.

Comcast on Friday abandoned its TWC bid after Justice and Federal Communications Commission signaled their opposition to a merger between the nation's two biggest cable TV firms.

The scuttling of two major technology mergers comes amid the Obama administration's clampdown on corporate M&A purportedly aimed at limiting U.S. taxes. While some chipmakers were reportedly uneasy with the Applied Materials-Tokyo Electron merger, a side issue may have been plans to make the Netherlands as their headquarters. Applied Materials is based in Santa Clara, Calif.

Inversion Aversion

AbbVie (ABBV) in October terminated its purchase of London-listed Shire. That came after the administration limited the benefits of tax inversion deals following deals announced by Burger King (QSR) and Stryker (SYK).

Before the anti-inversion crusade, Justice stepped up antitrust enforcement.

Justice in 2011 sued to block AT&T's (NYSE:T) proposed acquisition of T-Mobile US (TMUS), saying it would reduce wireless competition.

In August 2013, Justice filed a lawsuit to block the merger between American Airlines (AAL) and US Airways. Justice and the carriers reached a settlement later that year. The merger created the world's largest airline.

Even so, the FCC and Justice last year signaled opposition to a merger between Sprint (NYSE:S) and T-Mobile, the No. 3 and No. 4 wireless service providers.

No Good Behavior Break

Some companies have tested the waters for proposed mergers, holding out hope that deals could be approved with conditions. In Comcast's case, it offered to spin off a separate company to Charter Communications (CHTR), increase broadband services to low-income households, as well as extend conditions agreed to as part of its purchase of NBCUniversal from General Electric (GE).

Diana Moss, president of the American Antitrust Institute, says the Obama administration contends "fewer deals are fixable with structured remedies.

"Behavioral remedies, which don't remove any incentives for anti-competitive conduct and are difficult and costly to enforce, are unviable," she added.

The Federal Trade Commission, she says, has also opposed industry consolidation. In February it sued to block Sysco's (SYY) $3.5 billion purchase of US Foods.

Justice, meanwhile, was wary of chip-gear product development overlaps between Applied Materials and Tokyo Electron.

"The semiconductor industry is critically important to the American economy, and the proposed remedy would not have replaced the competition eliminated by the merger, particularly with respect to the development of equipment for next-generation semiconductors," Renata Hesse, acting assistant attorney general of the antitrust division, said in a statement.

Based on the Justice Department's hard-line stand, the firms "determined that there is no realistic prospect for the completion of the merger," Applied Materials CEO Gary Dickerson said on a conference call with analysts.

Loretta Lynch was sworn in as attorney general Monday, becoming the first African-American woman to serve as the nation's top law enforcement official.

William Baer has been chief of Justice's antitrust department since January 2013. He headed the FTC's competition division when it stopped a merger between Staples and Office Depot in 1997. Staples in February announced a new bid for Office Depot, which has merged with OfficeMax. The FTC is probing the deal, but many analysts say competition from Wal-Mart (WMT), Amazon (AMZN) and others makes approval likelier this time.

Despite the M&A environment, some companies are forging ahead.

Arris Group (ARRS), a maker of cable network equipment, on April 22 agreed to buy British set-top box maker Pace for $2.1 billion. Arris plans to reincorporate in the U.K., a move that would lower its taxes.

AT&T's purchase of DirecTV does not seem in trouble, analysts say. The Justice Department is also reviewing Halliburton's (HAL) $27.5 billion acquisition of oil service rival Baker Hughes (BHI).

Under the deal, Halliburton will pay Baker Hughes $3.5 billion if the deal falls apart. The Comcast-TWC and Applied Materials-Tokyo Electron deals did not involve breakup fees. AbbVie last year ponied up $1.64 billion to Shire shareholders.

Europe, which has battled with Microsoft (MSFT) and Intel (INTC), continues to be a regulatory worry for U.S. technology giants. The European Union on April 15 accused Google (GOOGL) of violating competition rules by distorting search results to favor its own shopping service.

The EU is also reportedly mulling the creation of a new regulator to oversee the Internet.