Paul Aversano and David Evans, managing directors at business consultancy Alvarez & Marsal, write from both sides of the pond on the implications of a Trump presidency for global M&A activity.
Since Donald Trump confounded the press, pundits, and financial markets by storming to victory on the 8 November, the world has been left wondering what his presidency might entail.
From an M&A perspective, however, the impact is clear, at least in the short-term. Nothing rattles the market like uncertainty, which Trump’s election created plenty of, and despite his personal fondness for making deals, his election has already suppressed activity in the US. So far, so obvious.
But as dealmakers across the globe look ahead to what promises Trump is likely to make good on – and which ones he might break –some less obvious opportunities begin to take shape.
For corporates in the US, already flush with cash, the future is undoubtedly brighter under a Trump administration than it is for those based outside of America.
The President’s plan to jumpstart the economy and double GDP growth from 2 to 4 percent alone is enough to give American corporates hope that record levels of M&A activity should continue.
In a flourishing economy, corporates that are still flush with cash will continue to transact, especially in a continued low interest rate environment where leverage is inexpensive. When comparing the interest cost to borrow to the cost to do a deal (or the opportunity cost of using cash on hand to transact) to what the economic benefits are of buying a business, it doesn’t take much to make a deal work. A Trump presidency could also see inflation creep up to 4%, which would bring an end to record low interest rates. This could result in a flurry of deals as people rush to lock in their debt structures at attractive rates. That being said, activity would likely slow down as the cost of borrowing money begins to rise.
Looking closer to home, the dollar has been stronger relative to almost every other global currency since the election. This will obviously exacerbate the Brexit effect we have already seen on sterling and prove tricky, for example, for UK based retailers selling popular American goods. But whilst US exporters may suffer, the reverse will be true for US companies looking to acquire businesses in the UK and indeed in other markets where we’ve seen currency depreciation, including the Eurozone.
Another major factor to consider is Trump’s stated intentions to relax the regulatory environment. In the States, this will not only drive M&A but also spur significantly more initial public offering (IPO) activity, which may become a more attractive option under less regulation. In particular, specialty pharmaceutical, biotech and device companies will benefit from this environment and as a result will see improved valuations and related activity.
From a European perspective, the relaxation of US regulation in sectors such as the pharmaceutical industry could prompt a similar ‘race to the bottom’ in the battle to stay competitive. Should this occur, we could see similar patterns begin to emerge on this side of the Atlantic, and a boost to deals made in this sector.
If Trump follows through on his promise to implement a special tax amnesty on US corporates repatriating cash currently trapped overseas, we’d suddenly see a wall of cash looking for a home. At least some of this money would be likely to drive M&A in the States and perhaps even internationally, dependent on how the President tweaks the tax code.
Of course, much has been made of what Donald Trump may or may not deliver over the next four years. Our predictions could be proved wrong as his presidency begins to take shape.
But regardless of the direction of his administration, we must not lose sight of the fact that there are other economic factors, such as cheap oil and currency exchange rates, that will likely impact the breadth and depth of deal activity in 2017.
Although these factors are still somewhat volatile, all signs are pointing to favorable deal activity, that builds on the record levels we’ve seen over the last few years.
Despite a very real global sense of uncertainty, for companies considering options and opportunities, now might very well be the time to act.
Paul Aversano and David Evans are Managing Directors at Alvarez & Marsal