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Tougher anti-trust enforcement action poses a risk to merger and acquisition activity involving U.S. firms, and may be a headwind to corporate earnings, says Fitch Ratings.

In a new report, the rating agency said that growing legal and regulatory challenges to M&A dealmaking and strategic partnerships based on competition concerns could weigh on growth and cash flows by limiting companies’ ability to gain economies of scale.

For example, the U.S. Federal Trade Commission and the U.S. Department of Justice have recently brought legal challenges to merger activity, in sectors such as airlines, pharma and tech, with “mixed success,” Fitch noted.

And, shareholder activists have disrupted companies’ merger strategies too, amid concerns about the risks and costs associated with large transactions.

These heightened legal and regulatory risks can create operational uncertainty and pose a distraction to issuers, while also potentially undermining their strategic ambitions and growth plans, Fitch said.

However, from a credit perspective, the impact of tougher anti-trust action is more positive.

For one, the benefits of M&A activity are often offset, at least partially, by the negative impact on corporate balance sheets, such as increased debt, from financing deals, it noted. And, it typically takes a long time for companies to realize synergies from corporate transactions.

As a result, the credit profiles of corporate buyers often deteriorates due to dealmaking.

Additionally, Fitch said that “the sector wide credit effects from tougher antitrust enforcement should be positive for rating stability over the next cycle, assuming it lowers M&A event risk and promotes a competitive playing field.”