A New Trump Administration Brings Optimism for M&A: What to Watch

Summary

WSJ What’s News Podcast Summary
Episode: A New Trump Administration Brings Optimism for M&A: What to Watch
Release Date: December 22, 2024
Host: Charlotte Gartenberg
Guest: Ben Dummett, Deal-Making Reporter, Wall Street Journal’s London Bureau

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Introduction

In the December 22nd episode of What’s News Sunday, hosted by Charlotte Gartenberg, the focus centers on the potential resurgence of mergers and acquisitions (M&A) activity under the incoming Trump administration. The episode delves into the factors contributing to a subdued M&A landscape in 2023 and explores the optimism surrounding a pro-business regulatory shift with Trump's presidency.

Current State of M&A

Charlotte begins by highlighting the downturn in M&A activity:

"2023 had the lowest number of M and a deals targeting US companies since 2015, and this year is likely to have an even smaller number of transactions announced," (00:39) Gartenberg notes, referencing deallogic data.

Ben Dummett attributes this decline to multiple factors, with regulatory scrutiny from the Federal Trade Commission (FTC) being a significant impediment.

Impact of Trump's Administration

The conversation pivots to the anticipated changes under President-elect Trump:

"Trump himself is a big reason and he's advocated pro business, relatively light touch regulatory regime," (01:55) Dummett explains. He emphasizes that Trump's administration aims to reduce hurdles for M&A by potentially dismantling the aggressive regulatory frameworks established under the Biden administration.

Key positive indicators include:

• Strong Macro Environment: U.S. equity markets are nearing record highs, facilitating deal financing through lower interest rates and higher stock valuations.

• Financial Sector Optimism: The day following Trump's election saw significant gains in major banks like JPMorgan Chase, Goldman Sachs, and Morgan Stanley, signaling market confidence in a forthcoming M&A boom.

Key Appointees and Their Influence

Charlotte probes into the impact of Trump's FTC and DOJ appointees:

Andrew Ferguson, FTC Chair

"By reputation, he's considered more deal friendly than Khan and has dissented from some of the FTC's enforcement actions," (03:12) Dummett remarks. Ferguson is expected to relax the stringent guidelines that previously hindered large mergers, particularly in sectors like energy.

However, Ferguson's stance on the tech sector remains cautious:

"He's expected to keep big tech deals in check, albeit for different reasons," (04:09) says Dummett. Unlike Lina Khan’s focus on preventing monopolistic dominance, Ferguson may scrutinize tech mergers for their impact on political expression and platform control.

Gail Slater, DOJ's Antitrust Division

"Slater's appointment on the whole is another positive for dealmaking because of her already close relationship with Trump," (04:17) Dummett adds. With her background in the National Economic Council, Slater is anticipated to align DOJ’s antitrust policies closely with Trump’s pro-business agenda, further easing M&A activities.

Potential Headwinds from Populist Republicans

Despite the optimistic outlook, Charlotte raises concerns about internal pressures within the Republican Party:

"If a deal jeopardizes political goodwill among his base, which is to a large degree populist," (05:12) Dummett explains, indicating that populist sentiments may still pose challenges. For instance, Trump has expressed intent to block deals like the Nippon US Steel acquisition to protect domestic jobs, showcasing a willingness to oppose mergers that conflict with populist priorities.

Potential Sectors for Increased M&A Activity

Ben identifies several sectors poised for heightened M&A activity:

Regional Banking

Driven by expectations of loosened financial regulations and the necessity for scale to compete with major banks like JPMorgan Chase.

Advertising

The merger of Omnicom and IPG for over $13 billion exemplifies traditional advertising agencies' need to consolidate and integrate advanced technologies to compete against digital giants like Facebook and Google.

Energy and Alternative Energy

With the sustained importance of energy security post-Ukraine war, traditional oil and gas companies may continue to consolidate, while alternative energy firms seek to strengthen their market positions amid fluctuating valuations.

Trends in Buyers and Deal Motivations

Strategic Buyers

Dummett outlines that strategic acquisitions are motivated by both offensive and defensive strategies:

• Offensive: Expanding market presence, entering new geographies, or acquiring new technologies.

• Defensive: Strengthening competitiveness against emerging tech rivals, as seen with Omnicom's merger to better compete in the evolving advertising landscape.

These strategies may also lead to more cross-border deals, offering expanded access but introducing higher risks.

Private Equity

Private equity (PE) firms are expected to become more active due to:

• Lower Financing Costs: Reduced interest rates make funding acquisitions more affordable.

• Increased Pressure to Exit: After struggling to sell assets in recent years, PE firms face mounting pressure to pursue larger and more numerous deals to achieve their return targets.

An example highlighted is Walgreens' recent talks to sell to Sycamore Partners, illustrating the renewed interest and activity within the PE sector.

Tech Sector Outlook

Contrary to expectations that reduced regulatory scrutiny would spur tech M&A, the sector presents a nuanced picture:

"Tech is historically a very active M and A market," (11:16) Dummett states, noting the increasing digitalization driving mergers.

However, specific areas like semiconductors are under scrutiny:

• Intel's Turnaround: Struggling to regain its market lead, Intel may sell stakes in its chip and self-driving technology units or become a takeover target if recovery falters.

Conclusion and Market Implications

Ben identifies investment banks as primary beneficiaries of an anticipated M&A boom:

"Those are a bet on increased M and A activity, which boosts the fees these banks generate from advising companies on deals," (12:27) he explains. The stock performance of major and boutique investment banks could serve as indicators of the market’s confidence in the Trump administration’s ability to stimulate M&A activity.

Charlotte wraps up by emphasizing the potential transformative impact of Trump’s policies on the M&A landscape, suggesting that stakeholders should closely monitor regulatory changes and sector-specific developments to capitalize on emerging opportunities.

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Notable Quotes:

• Ben Dummett:

  • "[...] Trump himself is a big reason and he's advocated pro business, relatively light touch regulatory regime." (01:55)
  • "He's expected to keep big tech deals in check, albeit for different reasons." (04:09)
  • "Those [investment banks] stocks have taken off in the wake of the election and that's all a bet on increased M and A activity." (12:27)

• Charlotte Gartenberg:

  • "President Elect Trump's coming term might bring fairer wins for mergers and acquisitions." (00:39)
  • "What sectors might see more deals and what exactly might those deals look like?" (06:31)

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This comprehensive summary encapsulates the key discussions from the episode, providing insights into how the new Trump administration could potentially reshape the M&A landscape across various sectors, influenced by regulatory changes and market dynamics.

Transcript

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[Charlotte Gartenberg]

It's Sunday, December 22nd. I'm Charlotte Gartenberg for the Wall Street Journal. This is what's News Sunday, the show where we tackle the big questions about the biggest stories in the news by reaching out to our colleagues across the newsroom to help explain what's happening in our world this week. President Elect Trump's coming term might bring fairer wins for mergers and acquisitions. We look at how and who might stand to benefit. Let's get to it. 2023 had the lowest number of M and a deals targeting US companies since 2015, and this year is likely to have an even smaller number of transactions announced, according to data from deallogic. There's no single reason, but many attribute recent choppy waters in dealmaking to regulatory scrutiny from the Federal Trade Commission. Donald Trump's presidential victory could signal smoother sailing for M and A, and the optimism's already showing. The day after the election, banks like JPMorgan Chase, Goldman Sachs and Morgan Stanley saw their biggest single day gains in four years. Mega cap tech companies also saw some big upticks that day. Here to walk us through what we might see in mergers and acquisitions in the coming year is reporter Ben Dummett, who writes about deal making from the Wall Street Journal's London bureau. First off, Ben, when's the optimism?

[Ben Dummett]

Trump himself is a big reason and he's advocated pro business, relatively light touch regulatory regime. One of the big obstacles for M and A, particularly big M and A under the Biden administration, has been the ftc, which is headed by Lina Khan, who's taken an unusually aggressive stance to big deals. Trump and the Republicans, they've already announced they will remove Lina Khan. They're expected to dismantle some of the obstacles that calm put in place to obstruct mergers, including new guidelines that spelled out which deals the FTC and Justice Department would challenge. Furthermore, the macro backdrop is good, particularly in the US the equity markets are on fire. They're near or at Record highs, the economy is doing well. Interest rates are coming down. Lower the interest rate, lower the cost of debt in order to finance deals. Similarly, in the case of high stock market, stock prices are important as well because the higher stock prices, the easier is to use your shares as a currency to buy companies as well.

[Charlotte Gartenberg]

Let's talk about some of the President Elect's appointees, particularly his Federal Trade Commission chair, Andrew Ferguson. What are we expecting from Ferguson?

[Ben Dummett]

Well, by reputation, he's considered more deal friendly than Khan and has dissented from some of the FTC's enforcement actions. That includes, for example, criticizing an FTC settlement which the CEO of Hess, a big US Energy company, from joining the board of Chevron once those companies complete their mega $53 billion tie up. That said, the tech sector is a different issue. Like Kahn, he's expected to keep big tech deals in check, albeit for different reasons. I mean, Kahn was motivated by by the desire to prevent companies gaining monopolistic power at the expense of consumers and competitors. Ferguson will likely be more driven in his potential opposition to propose big tech deals by the concern that the industry is using their platforms to stifle free political expression.

[Charlotte Gartenberg]

What about Gail Slater, heading the Justice Department's Antitrust division? How will her background maybe weigh on some of this?

[Ben Dummett]

The FTC and Department of justice share antitrust authority. So it stands to reason that Slater's appointment on the whole is another positive for dealmaking because of her already close relationship with Trump. She worked on the National Economic Council during the first Trump administration. The general view about Trump and his approach to governing is unlike last time, he is going to make sure that the people he surrounds himself with are on board with what Trump wants to do. That's another reason to think that Slater won't stand in the way of M and A to the extent it fits with Trump's overall agenda.

[Charlotte Gartenberg]

Right, but how much headwind can come from Republicans, more populous Republicans who have taken a more skeptical view of corporate power? And JD Vance is among those Republicans.

[Ben Dummett]

Yeah, no, that's a good point. I mean, it's true and so the proof will be in the pudding. Like for example, if we take pharma, will there be a lot of pharma deals? Historically, pharma has a track record of big M and A, but Trump is a populist. And the other Republican populists, I mean, they're obviously going to fight deals where they, for example, they see big Pharma coming together and that risk raising drug prices, deals that somehow jeopardize union power. For example, look at the Nippon US Steel deal. Now that hasn't been blocked yet, but Trump has said he'll block it. He's there to protect steelmaking jobs in the US That's a good example of where we could see him pivoting against steels. You know, the real test will be regardless of the industry, whether or not a deal deal jeopardizes political goodwill among his base, which is to a large degree populist.

[Charlotte Gartenberg]

While from the political end, we're looking at slightly smoother roads ahead. Coming up, as a change in political leadership paved the way for a reset of antitrust policies, what sectors might see more deals and what exactly might those deals look like? That's after the break.

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[Charlotte Gartenberg]

All right, Ben, we're going to take a look at some potential deals. Who might buy whom, who might merge and what is motivating these moves. What are the sectors you're watching right now or soon?

[Ben Dummett]

Well, one sector that's supposed to be particularly active is regional bank sector in the US that's largely driven by again expectations that Trump is going to loosen financial regulation. And at the same time, these banks, there's so many of them in the US that they're under increased pressure to get bigger, you know, gain scale if they want to compete with the mega banks like the JP Morgans. If we look at the Omnicom IPG deal which was worth 13 plus billion, those are two traditional advertising agencies that are joining forces in order to take on the ghouls of the world that emerging into that space and making it much more competitive. That's another area where there could be more M and A. Traditional advertising companies are facing increased competition from Facebook, from Google, etc. They need to be able to adopt more technology in the way they compete. Another sector where we've actually seen a lot of big deals happen is oil and gas. As a result of that, and because valuations in the alternative of energy space have suffered as energy security and the need for fossil fuels have become more important in the wake of things like the Ukraine war, you could see these, you could See consolidation by extension in the alternative energy space, you know, as they try to shore up their position.

[Charlotte Gartenberg]

So that was regional banks. You're looking at advertisers and possibly energy. Are there any trends in who's buying.

[Ben Dummett]

Whom on the strategic front? Strategics are driven either because they're on the offense and they want to grow either within their market or they're using acquisitions to expand into different geographies or to get access to different customers. You can expect to see, you know, bigger deals and more, potentially more cross border deals, you know, for example, Europe and the us US into Europe or US into Asia. Those deals are typically considered more risky, but they also offer the opportunity to expand geographically, get access to new customers, get access to new technologies. The other thing for strategics is they do it for defensive moves. Again, I know I'm harping back to it, but it's the most obvious example these days where you've got someone like Omnicom doing this big deal with ipg. That's a defensive move to try and maintain their competitiveness against these tech competitors that are emerging.

[Charlotte Gartenberg]

What about private equity? For example, earlier this month Walgreens was in talks to sell itself to PE firms, Sycamore Partners.

[Ben Dummett]

In the case of pe, there's an expectation that PE will become more active private equity. They raise funds in order to buy companies, but there's also pressure on them to sell these companies after 4, 5, 6 years and reap the returns that they expected to get from those investments. And what we've seen in the last couple of years, number one, they've slowed the activity of buying companies because interest rates made them too expensive. And number two, they've struggled to actually sell assets. So there is growing pressure on Peace to do more deals and do bigger deals, which some people expect that to happen because interest rates have come down and therefore deals are less expensive to fund. So there is an expectation, yeah, that the activity among private equity firms will increase.

[Charlotte Gartenberg]

Gotcha. In terms of trends, I was sort of expecting with Lina Khan leaving maybe tech, we were going to see more M and A in tech. But. But what deals might we see coming out of that sector? Or am I reading the room wrong?

[Ben Dummett]

Tech is historically a very active M and A market, mainly because we've lived in this world that is becoming much more and more digital. That said, you know, one of the big areas where interesting areas where there could be activity this year is in the semiconductor industry, particularly intel, which at one point was the, the chip company that led all others. You know, it's since been supplanted by the likes of Nvidia etc. Intel, actually they're in a turnaround mode right now. They're strapped for cash and so they've actually indicated that they plan to sell a stake in what's called their Altera dramable chip unit. It's also probably going to sell a stake in its self driving technology company called mobileye. But that said, if this turnaround effort doesn't come to pass, then intel itself could be a takeover target.

[Charlotte Gartenberg]

All right, Ben, before we go, we've talked about a lot of potential M and A. Are there any other sectors you're looking at that might benefit or not benefit as knock on effects of all this?

[Ben Dummett]

One of the big beneficiaries for Trump's election in anticipation of a sort of more M and A activity and capital markets activity more generally are the investment banks. Right, those stock prices you mentioned, Goldman Sachs for example, earlier. But also the boutique firms like investment banking firms like Evercore. Those stocks have taken off in the wake of the election and that's all a bet on increased M and A activity, which boosts the fees these banks generate from advising companies on deals. By extension, those the stock price of those companies could be an interesting bellwether to follow in terms of figuring out whether or not Trump is fulfilling his promises. Because if those stock prices come off, that's probably a good sign that the market is less confident of an M and A boom.

[Charlotte Gartenberg]

I've been speaking with reporter Ben Dummett. Ben, thanks so much for your time.

[Ben Dummett]

Thanks for having me. I really appreciate it.

[Charlotte Gartenberg]

And that's it for what's new Sunday for December 22nd. Today's show was produced by me, Charlotte Gartenberg with supervising producer Michael Kosmides. We got help from deputy editors Scott Salloway and Chris Zinsley. I'm Charlotte Gartenberg. We'll be back on Monday morning with a new show. Thanks for listening.

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