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While many deals fell through in 2016, observers expect strong 2017

By Brendan Releigh, Contributing writer

Two of the biggest deals in Central Pennsylvania over the last year were deals that were never completed. And they both involved organizations in Derry Township.

In October Penn State Health Milton S. Hershey Medical Center gave up on its plan to merge with Harrisburg-based PinnacleHealth System.

Two months before that, Illinois-based Mondelez International, maker of the Oreo, abandoned its takeover of The Hershey Co.

But failed mergers weren’t confined to Central Pennsylvania. 

The past year was strong for M&A activity, with deals large and small closing as 2016 approached its end. But many transactions fell by the wayside

As of June 52 deals had collapsed in the U.S. in 2016, representing a potential value of $401.3 billion, according to research firm Dealogic. The unconsummated transactions include the attempt by Canadian Pacific Railway to take over Norfolk Southern Corp., which has operations in Central Pennsylvania.

Observers chalked up the non-deals to lingering economic uncertainty, especially among buyers, as well as stricter FTC regulation, which blocked the union of Hershey Med and Pinnacle.

In other cases, such as Hershey and Mondelez, the failure comes down to unique circumstances.

“The rationale for the Hershey-Mondelez deal was really strong for both sides,” said Jason Cunningham, a managing director at accounting and advisory firm Baker Tilly. “But from Hershey’s standpoint, the (Hershey Trust Co.) controls so much of that business, that the ability to transact there was too challenging.”

As the books close on 2016 observers expect more action in 2017.

“I would expect more in 2017 due to the fact that more companies have recovered from the recession,” said Ronald Myer of Summit Advisory Inc., an M&A consulting firm based in Strasburg, Lancaster County. “When they first recovered, they weren’t able to sell right away because they needed some good historical performance. So now that we’re farther from the recession, they have a few years of solid performance, so they’re willing to go back to the marketplace to sell the companies. The discount would’ve been too large a year or two ago.”

Cunningham echoed Myer’s sentiments, noting that acquisitions can boost corporate growth in a tepid economy.

“There’s a tremendous amount of capital sitting on the sidelines that will need to be deployed,” Cunningham said. “And M&A is just one avenue to do that and, for larger companies looking for ways to break out of the slow-growth environment we’ve been in, that’s an effective way to deploy some of the capital. That way, it’s not just sitting there and you can make your shareholders happy.”

Buyers and sellers also might benefit from the administration of President-elect Donald Trump, which has indicated a desire to loosen regulations. “From a regulatory standpoint, 2017 is probably going to be less burdensome for businesses,” Myer said. “And I think that’s going to lend itself toward less scrutiny in the world of M&A deals.”

However, until he is officially sworn-in, Trump has been providing the M&A field with something that may be problematic: more uncertainty.

“His lack of providing many details while he was campaigning has left many unknowns for now,” said Myer. “You can only surmise which industries he will be favorable to. But we know he can change his rhetoric and right now we’re only basing our outlook on rhetoric, not actual policy.”

Absent concrete information to go on, potential buyers and sellers don’t have a way of knowing just how much deregulation will occur under Trump, or whether the other branches of the government will go along with the executive’s proposals. And that may stand in the way of the boost that 2017 seems to offer M&A — but for how long?

“It may make people hang on just a little bit longer to transact,” said Myer. “But if there’s confidence in the economy, we’ll see a good amount of M&A heading into 2017.”