The “Trump Effect” on M&A: Seven Predictions for 2017
By Dr. Alexandra Reed Lajoux, Board of M&A Standards/Founding Principal at CapEx
The inauguration of President Donald J. Trump in January 2017 could go down in history as the beginning of a new era for the U.S. economy in general and for M&A. The fulfillment of Trump’s pro-business and pro-American campaign promises could well bring increased vitality through value-enhancing M&A here and abroad. But exactly how will this “Trump Effect” on M&A play out? Will we see a rise or fall in number of deals? Will average deal size grow or decline? What will be the most surprising industry hotspot for deal making? How will the inbound/outbound U.S./foreign target ratio change? What will happen to multiples (e.g.ratio of deal price to earnings before interest and taxes)? What will happen with deal financing (debt vs. equity vs. cash)? What new trends will emerge? Here, following a brief overview of Trump’s economic plans, are my (admittedly optimistic) predictions.
Fundamentals
First, let’s look at the fundamentals of Trump-onomics most likely to affect M&A. A lifelong businessman and author of The Art of the Deal, President Trump will head a government geared to deliver pro- business policies with unprecedented vigor. Emboldened by a solid Republican majority in both the House and Senate, and benefiting from like-minded appointees in both the executive and judicial branches, Trump has an historic opportunity to oversee a radical transformation of the U.S. policy infrastructure. Dismantling old regulations, curbing new ones, and lightening a tax burden that has oppressed U.S. enterprises for more than a century, he will strive to “make America great again,” even as his administration attempts to negotiate better deals with our trade partners. The financial markets—including interest rates, equity and debt markets, commodity prices, and currency exchange rates are likely to reflect a positive response to new policies. Meanwhile, a stronger banking sector will be in a better position to loan to innovative new companies waiting for their eventual exit via M&A. But these new upside elements may be tempered by the downside of new limits for businesses that depend on outsourcing or imports, causing economic turmoil in these sectors. Each of these conditions will have a specific effect on M&A. Let’s take a look…
Predictions
1. Deal volume: Up. M&A activity rises and falls in waves large and small, driven by myriad factors, including higher acquirer confidence to inspire strategy, stronger stock prices to fund transactions, fewer regulations to impede transactions, lower taxes on the profits made from transactions, higher rates of innovation, and last but not least, industry shocks. Since all of these key drivers are likely to manifest themselves in the Trump’s first year, we could see a long-term M&A boom that jump starts in 2017. Using as a baseline the $1 million threshold metrics of deal-tracker Thomson-Reuters, we may see a distinct rise in M&A deal announcements involving a U.S. company as buyer and/or seller—with a rise in U.S. only deals, rather than inbound or outbound transactions. By the end of the year, the number of U.S. involved deals announced in 2017 should surpass 10,000, up from a lower number in 2016. (Total announcements as of the end of the third quarter 2016 were only a little above 7,000.)
2. Average deal size: Down. The coming M&A boom in the U.S. is likely to be concentrated in small- and mid-cap companies. Due to factors listed above at point #1, more of these firms will include M&A in their business plans, both as buyers and sellers. Meanwhile, there will be fewer mega-deals between pairs of multinational giants (aka “mergers of equals”), because they will be more preoccupied with adjusting to the new more protectionist U.S. regulatory climate and its impact on their business models.
3. Industry hotspots: Materials and Industrials. Business-to-business activities will heat up next year—finally. For the past five years in the U.S., the M&A headlines have been dominated by activity in the healthcare, energy, and high tech fields, with similar trends in global markets (occasionally alternating with real estate). From 2012 through the third quarter of 2016, the largest percentage of deal dollars each period went to those sectors, with relatively few dollars flowing to old line industrials and materials. In recent quarters, however, the materials and industrials sectors have began to attract more M&A activity in the U.S. and worldwide. In 2017, these two sectors could claim some of the largest pieces of the M&A dollar pie chart, particularly in the U.S., given Trump’s emphasis on rebuilding infrastructure and reviving manufacturing. Higher equity prices in these sectors will give their leaders confidence and currency to consider expanding through acquisition—including in some cases through unsolicited takeover bids via tender offers with large premiums.
4. Inbound/outbound patterns: Surprisingly steady. The so-called “protectionism” in the Trump agenda is based in part on a concern about our negative trade balance (more imports than exports, with money flowing out not in). But M&A cuts both ways. When a foreign company buys a U.S. company, there may be legitimate concerns about security and patrimony, but on the plus side, in most typical cases, money flows into the U.S. and jobs remain here. Conversely, when a U.S company buys a foreign company, this can be good for national pride, but may not directly contribute to job growth in the U.S. For these reasons, it is unlikely that Trump “protectionism” will hinder cross border deals involving the U.S. In 2017, most deals will probably continue to be domestic, with the remaining cross border ones being equally balanced for outbound vs. inbound deals, a current pattern identified by the Institute for Mergers, Acquisitions, and Alliances (IMAA). The U.S. will continue to be attractive to potential acquirers from United Kingdom, Japan, Canada, Germany, France, and Ireland—the six biggest spenders on inbound M&A in 2015, according to the Department of Commerce’s Bureau of Economic Analysis. By contrast, the recent interest from Chinese acquirers noted by the business press in recent days may be short-lived. Chinese companies announced more than 360 U.S. acquisitions large and small in 2016--twice the level of 2015, but this trend may slow, as Chinese officials have already expressed concerns (quoted by Bloomberg news in mid-December 2016) about “irrational deals.”
5. Multiples: Volatile. In the excitement of deal making, the multiples offered are likely to span a broad range from risk averse to risk-impervious, ranging from as low as 5x earnings before interest, depreciation, and taxes (EBITDA) to as high as 35x, but with the average at about 15, slightly higher than the average recorded in recent years by Thomson-Reuters.
6. Deal financing: Eclectic. If the Trump Administration and/or Congress succeed in dismantling Dodd-Frank, at the very least reducing pressure on smaller banks for prudent reserve criteria and stress testing, there could be a resurgence of bank financing for M&A, making debt a preferred instrument. At the same time, a stronger stock market will tempt some acquirers to offer share for their deals (although this could awaken shareholder concerns, as the issuance of new shares dilutes the value of existing shares). And with more activity at the smaller company level there could be a great deal of creativity with notes, earnouts, and/or contingency payments.
7. New trends: M&A professionalism. To catch and ride the coming M&A wave, companies will set about to recruit and develop the right people, both inside and outside the company. Making America “great again” requires M&A, but only if the transactions themselves are great. We have our work cut out for us.
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UPDATE 11/30/2017: The number of worldwide announced M&A deals is set for a fourth consecutive year of growth in 2017, driven by an extraordinary surge in dealmaking in NA that began in Q4 2016, following the election of US President Donald Trump. According to data from Thomson Reuters and Intralinks’ own analysis, the number of announced deals in NA in the first nine months of 2017 rose by 29 percent YOY. Every quarter since the end of Q3 2016 has seen NA announced deal count grow more than 20 percent YOY.
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ABOUT THE AUTHOR: Alexandra Reed Lajoux, M.B.A., Ph.D.,is the founder of McGraw-Hill's Art of M&A series, authoring or coauthoring all nine books in the series, including most recently titles on valuation and strategy. She is a member of the Board of M&A Standards and an advisor to the M&A Leadership Council. In March 2016, she retired from the National Association of Corporate Directors after three decades of service, becoming their Chief Knowledge Officer Emeritus. She is the founding principal of Capital Expert Services, LLC, a community of business, governance, and technical specialists qualified to serve as advisors and expert witnesses in complex transactions and in business litigation.
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