Conclusion: Politics, tech and plenty of capital
Following a record-breaking year, the US M&A market is taking time to digest recent deals, and uncertainty regarding broader macroeconomic and political issues is leading some to take a more cautious approach. Three broad factors are likely to influence activity for the remainder of 2016:
Politics at playThe political climate may lead many to proceed with caution. The UK’s Brexit decision ensures that economic uncertainty will continue in Europe, and the US presidential election in November may also cool the ardor for transactions. Stricter rules limiting tax inversions—a structure used for several pharma megadeals in recent years—may also give pause for thought.
Tech deal trafficThere are signs of more mid-size deals in the tech sector, with suggestions that the decrease in overall deal values is not reflective of the continued strength of this space. The number of actual deals has remained stable, and the economics for tech M&A remain viable. Moreover, the rapid pace of technological change can make it more practical for established tech companies to buy innovative start-ups rather than investing in their own R&D channels—a process that would be facilitated by many buyers’ cash-rich balance sheets.
Money on the tableThere is certainly available capital should companies wish to pursue an M&A route. Firms are still buying stock, which indicates that they have the resources for transactions. But many of the more exciting opportunities, such as fintech, are in the early stages, which makes it difficult to anticipate any major moves.
The rest of 2016As we go to print in late July, we see a noticeable slowdown in activity. We think the US M&A market is taking a short breather and will come back strongly in September, absent some big exogenous shock. Most of the conditions for a busy end of year remain in place: Lots of cash, low interest rates, strong stock markets (notwithstanding the elections and Brexit) and plenty of strategic imperatives in many industries that can best be satisfied through acqusitions.
US elections: an exercise in uncertainty
The febrile political atmosphere in US politics—particularly surrounding Donald Trump’s rise as the Republican nominee—has shifted political risk higher up the corporate agenda when it comes to gauging potential M&A decisions. Even in the early months of the presidential primaries, the political climate was already having an impact. New measures on tax inversions, introduced by the US Treasury Department in early April 2016, highlighted serious differences between the parties, notes William Dantzler, a partner at White & Case who specializes in tax issues. “Whereas the Democrats want to surgically cut out inversions and deal with the fact that our tax system is ‘out of whack’ with the rest of the world later, the Republicans want to use inversions as a hold-up opportunity to deal with the ‘out of whack’ tax system and so don’t want to do anything about inversions either tactically or surgically,” he says. While inversions are still being talked about in the presidential campaigns, Dantzler does not believe it will be an ongoing concern. “There won’t be many future discussions about inversions, but you will hear people talking about American companies leaving America and taking jobs with them,” he says. “Both Hillary Clinton and Donald Trump have assailed that in their different styles.” Another key consideration is the way the presidential candidates will deal with foreign ownership. In the past, Middle East and Chinese buyers have encountered opposition on national security grounds. Much of the focus will be on CFIUS. This inter-agency committee has a mandate to review inbound foreign direct investment where there is a merger, acquisition or takeover of a US business under which control effectively shifts to foreign ownership. However, the US electoral cycle does not necessarily impact CFIUS decisions. “There is a view that a change of administration in January 2017 could shift the overall perception of foreign direct investment. The current campaign rhetoric suggests that there’s going to be more scrutiny. For many investors, the impetus is to get deals done now,” says Farhad Jalinous, a White & Case partner with extensive experience with CFIUS issues. “But in my experience, campaign rhetoric doesn’t necessarily hold up,” he adds. “Once any new administration has settled into office, there aren’t usually any material swings in the pendulum regarding threat vulnerability analysis.” Bank lending is also on investors’ radar as the US presidential election approaches. New financing activity may settle down in the October to November timeframe as the market takes stock of the candidates, notes Eric Leicht, a White & Case partner who specializes in bank lending. At this point in the campaign, neither candidate has proposed anything that would seriously affect lenders’ appetite and willingness to support M&A deal flow. “Trump is viewed as pro-business, but Wall Street also craves stability and Trump is perceived as a wildcard by many,” says Leicht. “The general view is that a Clinton victory will be favorable for business, providing continued stability and an approach that should be the same or even more business–friendly than Obama’s.”
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