US antitrust regulators may have dealt a body blow to an already fragile mergers and acquisitions market with their decision to block AT&T Inc's $39 billion deal to buy T-Mobile USA.
For AT&T and T-Mobile's advisers, the immediate cost if the deal collapses would be about $150 million in fees.
For the dealmaking industry, costs could add up to billions of dollars in lost fees as the US Justice Department's decision on Wednesday forces companies to think twice about the regulatory risks in takeover attempts, bankers said.
"This shows the severe execution risks M&A deals are facing currently," a senior investment banker close to the AT&T/T-Mobile deal said. "It takes much longer to close a deal and some companies won't even start to negotiate a merger due to these heightened risks."
Indeed, the surprise move led to the widening of the spread on another large deal that faces a tough antitrust review.
Medco Health Solutions Inc's shares are now trading 23.4 per cent below Express Scripts Inc's $27.7 billion bid, with the spread widening about 9 percent since Tuesday.
The regulator's move comes as companies are already shying away from mergers and acquisitions as they deal with global economic uncertainty and market volatility.
The value of worldwide dealmaking dipped to just $180 billion in August, the lowest monthly total since April 2010, according to Thomson Reuters data.
The slowdown threatens to rob investment banks of advisory fees as deals that were anticipated at the start of the year fail to emerge or run into regulatory hurdles.
T-Mobile's advisers Deutsche Bank, Credit Suisse, Morgan Stanley and Citigroup, and AT&T's banks Greenhill & Co, Evercore Partners and JPMorgan Chase were on course to earn between $18 million and $36 million apiece for their advice on the deal, according to estimates from Thomson Reuters/Freeman Consulting.
"Obviously no one is going to say they are now afraid that their own deal is at risk, but everyone is going to have to revisit their antitrust arguments and make sure they are tight," said one investment banker, who declined to be named.
"This just makes everyone re-think their arguments and re-sharpen their reasoning," the banker said.
The Justice Department's decision came just months after the agency blocked a hostile bid by Nasdaq OMX and Intercontinental Exchange to buy rival NYSE Euronext. Both decisions were unusually fast for the agency.
But traders who bet on deals said these decisions were specific to the deals and did not mean policy makers were hardening their stance on competition issues.
"They knew what they were up against," said one merger arbitrageur, referring to the AT&T deal. "I see the Medco-Express Scripts spread opening up a little bit on that. I just don't think that's the right reaction."
The antitrust division of the department is also without a permanent head after Christine Varney left this summer to join the law firm Cravath, Swaine and Moore. That makes it hard to draw conclusions on whether there has been a policy shift at the department until a permanent replacement is named, a second merger arbitrageur said.
"Until you've got an actual commissioner in there, I don't think you can read through to other deals," the trader said.