Deals of the Week: Election Overhang

The outcome of fall voting suggests some unwelcome uncertainty for the M&A community.
By Bob O'Brien ,

There's no plank in the Republican Party's 2016 official platform that is going to make M&A transactions illegal, of course. But there are nevertheless some implications from the upcoming general election, now moving into its next stage after the conclusion of the Republican National Convention on Thursday night, that could find their way into the hearts and minds of asset owners, dealmakers, bankers and the extended M&A community.

The most prevalent one of them is the familiar bugaboo: uncertainty. We simply can't know, of course, who is going to win. And even when we do, we won't know what impact the winner will have on the U.S. economy, the capital markets and the regulatory backdrop until those inputs eventually evidence themselves. Uncertainty is a real buzz kill for transaction activity.

There are some signposts. A global M&A sentiment survey of 1,700 dealmaking professionals conducted earlier this year by Intralinks, a provider of secure document-sharing services used in due diligence activities, tried to shed some light on the impact the election outcome could have on deal activity.

With regard the candidates: 52% of respondents in the survey said a Donald Trump presidency would be a negative for merger activity; 24% believed his presidency would be a positive. (For the record, the survey was conducted well in advance of the Republican convention.)

Hilary Clinton's ascension to the White House would be more benign: 54% of respondents said it would have no impact on M&A; 22% believed her presidency would be a negative.

Of course, there would be other implications. A plank in the Republican platform called for the restoration of the Glass-Steagall Act, which would take us back to the era when commercial banks couldn't execute what are effectively investment banking transactions. What would happen to the likes of Dodd-Frank or consumer protection regulations is in the gloaming.

Would a Trump administration trigger a trade war? Or wars? Those could make cross-border transactions more difficult.

And of currencies? The weakness in the pound in the wake of the Brexit outcome makes U.K. companies more appealing. But does the forex dynamic change when the oath of office is administered?

Trump has been critical of U.S. companies, especially branded products companies, that make merchandise abroad. Would it be bad or good for M&A if apparel manufacturers or foodmakers had to disassociate themselves from their overseas suppliers, setting off a buying spree of domestic production capacity? Easier, probably, to buy those assets than build them from scratch.

What of healthcare transactions, easily the biggest sector of the merger market this year, if the new administration pursued the dismantling, or the expansion, of Obamacare? More of them? Less of them? No change?

All things considered, the biggest input could be the effect that the new administration, whichever it is, has on the overall economy. If regime change triggers instability in the economy, it will have the same effect on the merger market that the financial crisis had. Whether it's a transitory circumstance, or has lasting impact, well, add that to the list of uncertainties that the M&A community will have to contend with.

In deals of the week, there was a sighting of something rarer than a UFO: a multibillion-dollar deal that ranks with the biggest of the year. Softbank Group said it would spend $32 billion to buy ARM Holdings, the British chip design company. The purchase price reflected a 43% premium to where ARM was trading in London. The transaction marked one of the first efforts of cross-border buyers to take advantage of the weakness in the pound, as the British currency has fallen sharply in the wake of Brexit. The transaction also represented a reversal in strategy for Softbank, which has been an active seller of assets recently.

The transaction climbs into the fifth spot on the roster of big ticket deals this year.

Komatsu America, the U.S. subsidiary of manufacturer Komatsu, said it would spend $3.7 billion to purchase Joy Global, the Milwaukee-based manufacturer of mining equipment. The purchase represented a 20% premium to where Joy has been trading.

In the consumer sector, Unilever, the Dutch-Anglo branded products giant, said it would pay $1 billion for Dollar Shave Club, the subscription-based digital startup that offers, as its name suggests, discounted men's grooming products. The announcement touched off speculation that other players in the men's grooming market, such as Gillette, might look to mount takeover attempts for competitive digital retailers, such as Harry's.

Overall, trends in M&A remained much as they have been this year: more deals -- many more deals, in fact -- but with lower ticket prices. Year to date, there have been 4,078 transactions announced, a 64% bulge over year-ago comparables. However, the $1.3 trillion value total trails what we say a year ago by 15%.

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