What Impact Will the Trump Administration Have on M&A Deals in 2017?

By Gregg Schor, CEO, Protegrity Advisors

An optimistic economic outlook leads to an increase in deal-making, regardless of whether the administration is Republican or Democrat. Republican administrations are typically perceived as more business-friendly, and as a result, one would expect an increase in M&A transactions across the board over the next four years. However, uncertainty with the direction that the Trump administration will take surrounding some key issues, as well as certain external factors, may cause a slowdown in the number of deals, at least initially and with respect to transactions in excess of $1 billion. However, this uncertainty may not affect deals in the $5M to $500M range – and may actually serve as an accelerant for lower and middle market transactions.

Relevant Factors

Interest Rates. Rising interest rates make it costlier to finance deals through debt. Compounding that increase is the possibility that the corporate tax deduction for interest expenses is going to be eliminated. More "expensive" money can be a positive in the long term, since it is a check against bad deals that sometimes have the leeway to get done during times of less expensive capital. In the short term, it may lead to such things as more conservative valuations and buyers trying to encourage sellers to accept less cash at closing and higher equity stakes in the post-transaction entity.

Buy American. Trump would not be shy about "outing" companies or deals that would result in cuts to American jobs or where foreign acquirers seek control over American companies. This may give would-be dealmakers pause, but it will not totally eliminate deals falling into this category. However, it could reduce the number of deals and slow them down as buyers contemplate how to combat any potential damage to their brand.

Anti-Trust Climate. During the presidential campaign, Trump said of large mergers and acquisitions that he disfavors deals that result in "too much concentration of power in the hands of too few." He also said that Comcast's 2011 acquisition of NBC Universal should not have been approved, and that he opposed the AT&T/Time Warner deal. While it remains to be seen if or how deals of this type are scrutinized under Trump, statements like these cannot be ignored, and companies may be reluctant to go down this path, even if it makes financial sense, if governmental intervention presents too great of a risk.

China. According to Forbes, through mid-December 2016, Chinese companies invested $53.9 billion in the US via 75 deals, compared to $11.7 billion in 2015. Even putting aside Trump's saber rattling and tough talk on China, the stricter internal controls that the Chinese government instituted on the flow of capital leaving the country indicates that 2017 will be far closer to 2015 numbers. A decrease of about $40 billion is a large void to fill, and means that there will be some relaxation of buy-side demand for deals in the $750 million to $1 billion+ range.

Conclusion

More deals for companies with $5 million to $100 million in revenue. Based on the above factors, it seems likely that there will be a reduction in the number of deals at the high end of the market. But the lower end of the market, where deals are primarily domestic, with no anti-trust or international implications, will remain robust in 2017 and could actually accelerate given the challenges associated with larger deals and the probability that focus and capital will be re-deployed to a greater number of smaller deals. While capital may become more expensive, there are still many more well-funded buyers than worthy sellers in this range, giving the sellers an advantage. In addition, while the decision to sell at the higher end of the market is dictated solely by financial considerations and fiduciary responsibilities, the majority of closely-held and family-run businesses ultimately make the decision to sell their company based on factors not connected to the economy, with the leading drivers being desire to retire and being burned out.

To discuss the impact of today's M&A climate on the sale of your business, please contact us.

Gregg Schor is the CEO of Protegrity Advisors, a leading regional M&A advisory firm serving businesses with revenue from $5 million to $100 million across a wide range of industries including manufacturing, retail, technology, healthcare, and construction. Headquartered in Ronkonkoma, Protegrity Advisors has relationships with private equity, strategic and other types of buyers and sellers across the United States and internationally. If you are thinking of selling your business, call Protegrity Advisors at (631) 285-3172 or email Gregg at gschor@protegrityadvisors.com.


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