There's more uncertainty than usual this election, which sees Democratic nominee and former Vice President Joe Biden challenge President Donald Trump for the White House. The coronavirus pandemic is still affecting the daily lives of millions of Americans, tensions between the U.S. and China have bled even further into the deal-making world — with the ongoing TikTok situation as an example — and the sitting president can be unpredictable.
According to Deloitte's Future of M&A Trends Survey, which was released Oct. 6 and features input from 1,000 executives at U.S. corporations and private equity firms, deal makers are split on what impact the election will have on M&A. Of those surveyed, 25% said uncertainty surrounding the election has slowed deal activity, while 23% said it has accelerated activity. Meanwhile, 61% said they expect M&A activity to return to pre-pandemic levels within the next 12 months.
"This one's tough," said Kimberly Smith, a partner at Katten Muchin Rosenman LLP and co-chair of the firm's global mergers and acquisitions and private equity practices. "Everything is such a wild card."
Indeed, there are plenty of variables affecting the health of the financial and business markets right now, but one important element for a healthy M&A market has remained constant, according to Snell & Wilmer LLP partner Garth Stevens: access to readily available debt financing.
"Both presidential candidates support active measures being taken by the Treasury Department and Federal Reserve to preserve a healthy banking system and stable access to capital, so I don't expect the results of the upcoming election to have any material effect on bank financing for M&A in the near future — which is good," he said.
Still, the simple fact that this is a presidential election year means the market is fraught with uncertainty. Some business owners are trying to gauge who might win and what their victory could mean for deal costs, while others have been racing to get deals done before any changes can be put in place after the election.
"In general, the deal world is more comfortable with less uncertainty," said Rahul Patel, a partner at King & Spalding LLP and co-chair of the firm's global private equity and mergers and acquisitions practice. "Any time you have predictability and stability on fronts like the stock market, monetary policy, tax and regulatory policy, it's much better for the deal environment because it reduces variance in analysis of valuation and risk."
In normal election years, it's obvious how a given outcome could affect certain major M&A issues. There are still issues like that this year, but the coronavirus chaos has made things less clear.
For instance, prior to the pandemic, there was a general sense that higher tax rates could be expected in 2021, primarily if Biden won the election. Under his proposed tax plan, the corporate tax rate would be raised to 28% from 21%, resulting in M&A deals getting more expensive. But in the wake of COVID-19, there's a sense that taxes might go up no matter who wins, in part because of the money the government injected into people's wallets and the economy through legislation.
"There's a wider recognition now that taxes will probably go up either way," Smith said. "People are realizing that the stimulus programs put in place post-COVID — and perhaps there will be more of that on the way if Congress can reach a deal — that tab is going to come due at some point. And that will probably result in higher tax rates. I don't know if people are necessarily viewing that as a Republican vs. Democrat issue. It's setting in as a reality either way."
Additionally, four years ago, the idea of repealing and replacing the Affordable Care Act was seen as something that could drastically impact many businesses in the field of health care services.
"I don't feel like we have an issue like that here that broadly affects so many deals," Smith said.
Instead, the big question this year is how the pandemic will be handled in the aftermath of the election, according to Neil Torpey, a corporate partner at Paul Hastings LLP.
"We have some distance to go before we are past the COVID-19 crisis," he said. "We need advanced therapeutics to be widely available and, ultimately, an effective and safe vaccine."
There are harbingers of further difficulty in the U.S. economy, Torpey said, including elevated unemployment levels and decimated industries like the airline and entertainment industries, which will "need to be nursed through a long recovery period."
"Even so, and no matter who wins the 2020 election, favorable conditions exist for very significant M&A activity for the next few years," he said.
Private equity buyers, for example, are loaded with billions of dollars in dry powder that has been raised in recent years and must eventually be deployed. The PE industry is well-positioned to capitalize on a potential rash of special situations and distressed deal opportunities in the coming months, Torpey said. Additionally, high stock prices in the public markets will provide strategic buyers with a "powerful currency to use to make acquisitions," he said. Further, the recent explosion in special purpose acquisition vehicles, or SPACs, is expected to continue.
"Nothing being proposed by either candidate is going to stop these trends from playing out in the form of increasing M&A deal activity," Torpey said.
Even though M&A activity is widely expected to tick up no matter who wins, the victor can still have an impact on the sector, as well as on regulatory enforcement as it relates to M&A.
The Trump administration has certainly taken aim at China, and there's no reason to believe that the Committee on Foreign Investment in the United States will stop scrutinizing deals that feature foreign buyers and companies that hold personal data of U.S. citizens. But the U.S. Securities and Exchange Commission has remained relatively quiet when it comes to enforcement actions in the last few years, and a change in the president could portend a shift in the general regulatory and enforcement strategy.
"I do think the regulatory regime under a Biden administration would be tighter than what we have today," said Michael Fieweger, a partner at Baker McKenzie and chairman of the firm's North American private equity practice group. "Enforcement would be stepped up across a variety of agencies, including DOJ and FTC scrutiny of transactions from an antitrust standpoint. The SEC, for example, has been pretty quiet under Trump. It would probably get a little louder under Biden."
All of this is simply people's best guesses as to how things might change depending on the outcome of the election, and it's important to remember that president is only one of the positions on the ballot. The election's effects on the M&A world will vary depending on whether the Senate remains controlled by Republicans or is turned blue, said Sander C. Zagzebski, a partner in the corporate and business practice group at Greenspoon Marder LLP.
No president can unilaterally change the tax policy to fit their exact preferences unless they have support from other branches of the government.
"It's not just Biden vs. Trump," Zagzebski said. "You also need to think about a little more than that."
Regardless of how the election shakes out, experts are expecting deal activity to pick up in the days, weeks and months ahead, so attorneys should prepare for a deal-heavy 2021 and beyond.
"I don't think that either a Trump or Biden administration would enact policies that would result in a significant limitation on the increased M&A activity we expect once we get past the limitations and uncertainties caused by COVID," Fieweger said.
--Editing by Rebecca Flanagan and Marygrace Murphy.
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