Multibillion dollar deals that willreshape the healthcare and media industries have set 2018 on courseto be the biggest year on record for global mergers andacquisitions (M&A). Now, after an unprecedented five years ofbumper activity, dealmakers are starting to sound a note ofcaution.Companies announced $2.1 trillion of transactions in thefirst half of 2018, putting this year on track to beat 2007's $4.1trillion total, according to data compiled by Bloomberg.Twenty-four acquisitions valued at more than $10 billion bolsteredthe numbers, the data show, including Takeda Pharmaceutical Co.'s$62 billion purchase of Shire Plc and T-Mobile US Inc's $26.5billion takeover of Sprint Corp.As the M&A juggernaut rollson, some advisers are starting to ask how much longer the deliriumcan continue. Unlike the 2000 dot-com bubble or 2007'ssubprime-mortgage crisis, though, this time there's no one clearthreat looming. Instead, a myriad of warning signs are cited aspotential hazards.“The U.S. and European M&A markets are firingon all cylinders, and we're experiencing a risk-on moment,” saidEamon Brabazon, co-head of M&A for Europe, the Middle East, andAfrica at Bank of America Corp. “What comes up, tends to normalizeover time,” he said, naming potential headwinds such as highvaluations, antitrust and regulatory uncertainty, and geopoliticalrisks.“Anyone who has seen this play out before, and is involved inthe M&A market regularly, has to be aware that at some point intime some of these risks might exercise a dampening influence onthe market,” said Stephen Arcano, M&A partner and global headof transactions at law firm Skadden Arps Slate Meagher & FlomLLP.But for now, the acquisition appetite is holding strong. OnWednesday, Rupert Murdoch's 21st Century Fox Inc. boosted its bidfor Sky Plc, valuing the broadcaster at 24.5 billion pounds (US$32billion) and besting Comcast Corp.'s earlier offer.Since theS&P 500 Index hit a record high in January, a widening tradewar with China and geopolitical tensions around the U.S.'srelationship with both North Korea and Iran have rattled markets.Regulators such as the Committee on Foreign Investment in the U.S.have cracked down on takeovers of homegrown companies by overseassuitors, scuttling the biggest deal of the year after sayingBroadcom Inc.'s attempt to acquire Qualcomm Inc. could pose anational security risk. U.S. President Donald Trump blocked thedeal in March.China, reviewing ways to retaliate against new U.S.tariffs on its products, may delay approval of deals involving U.S.companies, the Wall Street Journal said Wednesday, citingunidentified Chinese officials familiar with the plans.

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Shares Slump for M&A Participants

Investors are also starting to sound a note of caution on therecord levels of M&A, sending down shares of companies thatannounced deals by the most in at least a decade.The global M&Amarket, measured by the share-price performance of both acquirersand target companies, had its worst quarter since 2008, accordingto a report from Willis Towers Watson. Dealmakers underperformedglobal indexes by 6.1 percentage points in the first quarter of2018, a dramatic reversal of the trend since the start of thecurrent M&A cycle, which has seen shares beat the markets by asmuch as 17.1 percentage points.“The poor performances that havefollowed completed deals suggest investors right now have verylittle margin of error,” said Jana Mercereau, head of corporateM&A for Great Britain at Willis Towers Watson.“It's also hardto ignore that the last two occasions when M&A activity reachedsimilar levels were a year before the financial crash in 2007 andjust before the bursting of the dot-com bubble in 2000,” Mercereausaid.The sharp drop off in deal performance signals investors'fatigue with a cycle that's set to deliver a fifth consecutive yearwhere deal volumes top $2.5 trillion, the Bloomberg data show. Evenif M&A activity is flat through the rest of the year, 2018 willstill top every year on record.“It likely will be a record year,but it'll be difficult to maintain the pace we're on for anothersix months,” Steve Krouskos, global vice chair of transactionadvisory services at EY, said in an interview on BloombergTV.

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$100 Billion Proves M&A Financing Still Available

Still, credit market investors are largely ignoring rising leverageand deteriorating covenants, remaining ready and willing to supportdeals with debt. Sale of U.S. investment-grade bonds tied toM&A surged by 50 percent, to $154 billion, in the first halfcompared with a year earlier, data compiled by Bloomberg show. Andit's not likely to let up in the second half, with more than $1trillion in M&A debt deals pending, according to BloombergIntelligence.“One of the unique aspects of the current backdrop isthat it's been active both across corporate acquisition finance aswell as leveraged buyouts,” said Anish Shah, global head ofinvestment grade acquisition finance at Morgan Stanley.“In terms ofthe magnitude of deals that can get done, Broadcom and Cigna areboth good benchmarks,” Shah said, referring to Broadcom's blockedbid for Qualcomm and Cigna Corp.'s $54 billion bet on ExpressScripts Holding Co.“The fact that a corporate acquirer could obtain$100 billion in committed financing opens up a lot ofpossibilities,” he said.

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