This commentary originally appeared on Real Money Pro at 8:17 a.m. ET on Tuesday, April 5. Click here to learn about this dynamic market information service for active traders.
The U.S. Treasury dropped a bomb on the M&A arbitrage community last night, issuing an unexpected ruling on so-called corporate "inversions" that could doom the proposed merger between $110 billion Allergan (AGN) and $190 billion Pfizer (PFE). The action could also put an end to Pfizer's inversion plans.
As I've written before, history "rhymes" -- and yesterday's surprise decision and the likely breakdown of the Allergan/Pfizer deal remind me of "Black Friday" on Friday, Oct. 13, 1989. That's when the breakdown of a $6.8 billion leveraged buyout deal for UAL Corp. triggered the collapse of the junk-bond market and a short-term stock-market top.
Equities tanked after news of the UAL deal's demise broke, as the market feared an abrupt contraction in future takeovers. The Dow Jones Industrial Average ultimately dropped nearly 7% for the day, while the S&P 500 shed more than 6%. The Dow transports likewise lost more than 5%, followed by another 7%+ decline during the next trading session.
The economic backdrop at that time was much like today's. We had very slow real growth, due to fresh wounds from the savings-and-loan crisis earlier that year and residual effects of the October 1987 Wall Street crash. In fact, some even believe that "Black Friday" helped spark the late 1980s/early 1990s U.S. recession.
"At times, the intelligence of that creature known as 'a crowd' is the square root of the number of people in it."
-- Doug's Daily Diary, Negative Rates Should Scare the Hell Out of Every Investor (March 31, 2016)
Allegan's price decline -- some 20% in premarket trading as of last check -- will represent another huge blow to the hedge-fund community, as some 80 large funds reportedly have AGN as a top-10 holding. The stock's pullback will thus join previous hedge-fund investment boners like Sun Edison (SUNE) and Valeant Pharmaceuticals (VRX).
The Treasury's move might also have broad, negative consequences for future mergers based on inversions. You can read Goldman Sachs' analysis (via Zero Hedge) here.
The bottom line: It's said that we are what we repeatedly do. UAL, Allergan ... the late Yogi Berra was right: "It's like deja vu all over again."
And I remain manifestly bearish.
(Allergan is a holding for Actions Alerts Plus, which Jim Cramer co-manages as a charitable trust. Click here to learn more about the portfolio, or here to read Cramer's take on the Treasury decision.)