Dealmakers Expect a “Trump Bump” on M&A

Steven Lipin is a Senior Partner at the Brunswick Group LLP. This post is based on a Brunswick publication by Mr. Lipin. Additional posts addressing legal and financial implications of the Trump administration are available here.

After an unpredictable political cycle and an equally unpredictable M&A environment in 2016, dealmakers have refreshed their outlook for M&A activity under the Trump administration—and they like what they see. According to Brunswick Group’s 10th Annual Global M&A Survey, about 44% of respondents expect M&A activity to increase in 2017, a significant surge since last year, when only 13% of respondents were optimistic about M&A levels growing in the wake of record-breaking levels in 2015. At the same time, practitioners expect more scrutiny of cross-border deals, particularly from China, and a lighter touch with regard to antitrust obstacles. And the impact on jobs will be front and center.

This proprietary survey of 120 top M&A practitioners and observers around the world, including lawyers, bankers, advisors and financial reporters, suggests how the M&A landscape is expected to change in 2017 and offers insight into how companies may navigate the new terrain.

A Trump Bump?

Last year, when the survey was conducted at the start of the U.S. presidential primary elections, dealmakers selected Donald J. Trump as the candidate most beneficial to deal-making and corporate interests. This optimism regarding M&A persists despite Trump’s populist campaign, during which he rallied his supporters against big business and large M&A deals.

Under the new administration, this year’s survey respondents view President Trump as a boon for M&A in 2017, betting that the president’s oft-cited transactional worldview is fundamentally friendly to deals. Half of dealmakers believe the overall impact of the Trump administration will be positive for M&A, and an overwhelming 71% expect that antitrust scrutiny will decrease. Less than a third of respondents (29%) see the Trump administration as a setback for M&A.

Dealmakers are excited by vows to implement corporate tax reform, a hallmark of the Trump presidential campaign, as well as potential new guidelines on cash repatriation, as these measures would free up balance sheets and empower companies to pursue more M&A. Among the anticipated changes under the new administration, over half of respondents see corporate tax reform (58%), antitrust policies (52%) and repatriation of offshore cash (51%) as the top three drivers of deal activity in 2017.

However, the view is that not all excess cash derived from Trump’s anticipated changes will be used by companies to pursue M&A opportunities or reinvest in growth. Dealmakers expect companies to return capital to shareholders by applying about as much of the potential excess cash toward share buybacks (78%) as to M&A (76%), with nearly half of respondents expecting greater dividends.

Sealing the Deal

Despite optimism, the Trump administration does not represent free reign for dealmakers. The president’s willingness to criticize companies from his Twitter account for offshoring jobs is a signal that he plans to hold fast to his “America First” credo. Trump’s presidency places new emphasis on the impact of M&A on local communities and job creation, and companies must be prepared to address these concerns as they seek to successfully close M&A transactions with regulatory and public approval. For example, 68% of respondents believed commitments to investing in the U.S. would need to be considered when making an M&A decision. Similarly, 60% of respondents felt job creation would be a factor.

With this in mind, the vast majority of survey respondents (70%) predict that domestic deals will drive M&A in 2017. International deals are likely to face more roadblocks under the Trump administration, with 72% of dealmakers predicting that foreign inbound deals will face greater scrutiny from the Committee on Foreign Investment in the U.S. (CFIUS). But even domestic deals may come with more strings attached—56% of respondents believe that the administration would require domestic investment in exchange for overseas cash repatriation.

The Role of Activists

According to this year’s survey, shareholder activists will maintain their influence, and their presence may be felt beyond corporate boardrooms. With high-profile activist investor Carl Icahn serving as a special advisor to President Trump, the activist perspective may gain greater influence over policy and regulation. Just over half of survey respondents (52%) predict that the level of shareholder activism activity will remain steady in 2017, a large amount (41%) predict an increase and few (6%) expect a decrease from 2016. At the same time, the majority of respondents (58%) predict that companies are more likely to settle with activists than engage in proxy fights, extending 2016’s trend toward settlements.

The survey respondents continue to expect activists to make a wide array of demands, predicting that M&A (20%) and spinoffs/divestitures (20%) will be nearly as prevalent as recurring demands for operational and performance improvements (27%) and returning capital to shareholders (21%).

Sectors to Watch

Respondents identified a wide range of sectors as likely to see the most deal activity in 2017. Most respondents (38%) predict that healthcare services and providers will undergo the most consolidation, even in the face of healthcare reform. The Republican Party’s effort to repeal the Affordable Care Act (ACA) generated significant uncertainty, but the party’s failure to gather the necessary votes means the ACA will likely remain the law of the land for the foreseeable future, providing greater bandwidth for long-term planning in the health industry.

Other industries identified as likely to see the most deal activity were energy (37%), pharmaceuticals/biotechnology (36%), consumer goods/retail (35%), and technology hardware/software (33%). Respondents predicted that automotive/transportation, utilities and telecoms would be among the least active sectors.

The Overall Outlook 

With a more optimistic outlook on deal-making and a softening regulatory environment, the M&A community is gearing up for greater activity in 2017. Though the Trump administration promises to deliver an array of policy changes that would encourage M&A, unpredictability remains the rule in 2017. In fact, most dealmakers (61%) don’t expect meaningful corporate tax reform to be implemented until 2018, and it remains to be seen if the bet by dealmakers that Trump will align himself with financial and corporate interests will deliver another global M&A boom.

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