A second term for President Obama probably means a mixed outlook for deal-making, with some possible upside as the economy continues a slow recovery. In other words, it’s the status quo.
The merger market is in a lull. For the first nine months of 2012, worldwide mergers and acquisitions activity is down 16 percent, to $1.7 trillion, from the same period a year ago, according to Thomson Reuters data. The United States market is in a bigger slump, down 21.5 percent from the 2011 period. The number of transactions is also down 13 percent, to 7,605 announced deals from 8,790.
We’re likely at a cyclical bottom in terms of M.&A. activity, but any improvement is likely to be modest at best. That’s because deal-making is generally driven by the stock market and the economy. The United States is in a mild recovery, but the outlook for Europe and Asia is weaker.
The United States government, of course, can affect the economy and grease the wheels for deal-making. With this in mind, here are the important things that deal makers will be watching for in the Obama administration:
The Fiscal Cliff
Deal makers prefer certainty. The uncertainty around “the fiscal cliff” — the simultaneous tax increases and spending cuts set to take effect in January unless Congress acts — will be a big factor in M.&A. in the next few months.
First, the specter of higher taxes is likely to lead to a short-term flurry of deals as people rush to sell their businesses at a lower capital gains tax rate. George Lucas, for example, likely saved as much as $100 million by selling Lucasfilm this year instead of next year when the capital gains rate is scheduled to go up by at least the 3.8 percent surcharge imposed by the Affordable Healthcare Act.
But over all, deal makers are likely to wait until there is some sort of resolution. And whether it is a grand bargain or merely kicking the can down the road again, any agreement is likely to be enough to bolster the outlook for deals.
That being said, both the fiscal cliff and any legislative bargain raises the issue of tax increases generally in the Obama administration and their effect on deal-making.
Mr. Obama is on record as wanting both an increase in the income tax rate for high earners and an increase in the capital gains tax rate to 20 percent.
If the president wins on this issue, it still may not be a significant drag on mergers. The data on whether capital gains and tax rates generally impede deal-making is uncertain. Certainly during the Clinton administration, when taxes were higher, M.&.A. was robust.
Regardless of what happens with capital gains and the fiscal cliff, one tax that is likely to be raised in an Obama administration is the carried interest tax on private equity. Will this lead to less deal-making? Private equity says so, but again the data is uncertain, and the industry has been expecting the tax to rise for years. And there may be very easy workarounds to avoid this tax anyway by simply having the private equity partners invest directly in the firms. So, don’t expect it to change deal activity much.
Another tax piece unrelated to the fiscal cliff is the chance that Congress will pass a tax holiday for American companies to repatriate the trillions of cash held abroad. The Obama administration has been averse to such a holiday, but the sum is getting too big for Congress to continue to ignore, and if there is such a holiday, it will provide more hundreds of billions in cash with which to do deals.
The election of Elizabeth Warren to the Senate has some talking of a further crackdown on Wall Street. But she is just one senator, and the Dodd-Frank Act sucked out a lot of the political air toward increased regulation. House Republicans would also no doubt object, and they will be the biggest impediment to more regulation.
So, at best, the Obama second term likely means more status quo in terms of putting Dodd-Frank Act into effect. The financial regulatory overhaul has been bogged down in battles among regulators and it is expected to be challenged in the courts. So there is a real possibility that some fixes to Dodd-Frank may be made that cure some minor parts of its regulatory overreach or other deregulatory bills passed. And remember that the president did sign the Jumpstart Our Business Start-ups Act to partially deregulate the market for raising capital.
The bottom line is that there’s unlikely to be much of a change toward increased regulation of Wall Street and possibly even some deregulation. Either way, deal-making won’t be much affected.
This is one area where Mr. Obama’s second term may have a clear upside for deal makers. Mitt Romney had said that he would name China a “currency manipulator” on Day 1 of his administration. This would have upset relations with our largest trading partner at a minimum and may have been indicative to more combative global trade policies. In today’s world, where Canada, Australia and Europe are actively seeking to block deals on national securities grounds, Mr. Obama’s more conciliatory approach may smooth these wheels for deal-making in an increasingly nationalistic global climate.
The Obama administration has not been as strict as some expected in this area. Indeed, in its first two years, the administration had a similar enforcement record for mergers as the last two years of the Bush administration. Still, the Justice Department allowed Continental Airlines and Delta Air Lines to combine but also blocked the AT&T/T-Mobile tie-up and H&R Block‘s acquisition of TaxACT. A Romney administration may have been more liberal in allowing mergers, but not much more than the Obama administration.
All of this leads to the conclusion that things are likely to remain the same with possibly a bit of an uptick as the economy improves. A second-term Obama administration may affect things around the edges, but that is about it.
Still, there may be a real, unexpected upside for deal-making. To be sure, Mr. Obama is not about to do what Wall Street wants and significantly reduce taxes or deregulate the industry.
But if, now comfortable in a second term, his economic team can push through real tax reform and a longer-term resolution of the fiscal cliff, it will provide needed certainty and avoid economic contraction.
As the housing market finally enters recovery mode, these events are likely to produce added growth. If so, then this will set the stage for further economic growth and more deal-making.
BY STEVEN M. DAVIDOFF for the DealBook