Trump's tentacles have reached the mergers space, as well

Trump's tentacles have reached the mergers space, as well
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When Donald TrumpDonald John TrumpTrump nominates ambassador to Turkey Trump heads to Mar-a-Lago after signing bill to avert shutdown CNN, MSNBC to air ad turned down by Fox over Nazi imagery MORE took office as America’s 45th president over a year ago, we entered the new term with plenty of questions over what policy changes to expect. While many uncertainties remain, they haven’t diminished companies’ need to grow as the pace of transformation accelerates across decades-old industries.

The number of mergers and acquisitions in the U.S. was up 11 percent last year, and dealmakers have kicked off 2018 with a series of megadeals north of $5 billion.

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Technological and other disruptive forces will largely drive mergers and acquisitions (M&A) and other deals in the year ahead, but we would be remiss to ignore how the Trump administration has influenced this activity in a few different ways and how it could accelerate the pace of deals even more in the near term.

 

Tax reform

Consider the landmark U.S. tax reform law, which could stimulate deals in the year ahead. At 38.9 percent, the U.S. had the highest statutory corporate tax rates among the world’s advanced economies within the Organisation for Economic Co-operation and Development.

With the tax cut, the U.S. rate is now below the worldwide average of 22.96 percent, positioning the country to be an even more desirable place for foreigners to do business. There are currently more U.S. businesses making acquisitions abroad versus the other way around. The new law could narrow that gap.

The tax savings also means companies will likely have more cash on hand, but that could also effectively push valuations higher at a time when booming U.S. valuations have already led dealmakers to hold off on M&A targets.

While the law’s reductions in tax credits and deductions may also prompt investors to pause, the one-time repatriation tax holiday could actually spawn more deals, since it would return billions of dollars to the U.S. from overseas.

True, some corporations may choose to pay down debt or buyback shares, but many others may see this as an opportunity to invest in the future.

Already, companies like Bank of America, JetBlue and Walmart are using some of their tax savings to hand out bonuses and invest in their employees. With a more competitive tax code, companies also have the ability to acquire emerging technologies to expand into new markets or partner with digital startups to access new talent and expertise. Either way, the tax savings will prompt CEOs to think hard about their next move.

Trade policy

Uncertainties over U.S. trade policy won’t likely deter dealmakers. Riding populist sentiment, one of Trump’s first major moves in the wake of the 2016 election was pulling out of the world’s biggest proposed free trade deal.

The Trans-Pacific Partnership (TPP) would have included roughly 40 percent of global GDP and one-third of global trade, but Trump’s withdrawal from the 11-nation pact hasn’t discouraged CEOs from expanding their businesses overseas.

Critics may say the U.S. is getting left behind, but CEOs from Asia-Pacific nations said in a recent PwC survey that the uncertainties of global trade policy have prompted them to rely more on strategic alliances and partnerships with firms abroad. They see new opportunities, even as the Trump administration reconsiders the terms of decades-old trade agreements, including NAFTA.

It’s also possible that Trump’s populist rhetoric blaming free-trade agreements for America’s manufacturing job losses could give way to more traditional GOP views of free trade. Last month at the World Economic Forum in Davos, Trump said he would reconsider TPP if the U.S. could strike a “substantially better” deal, although member countries have moved on without the U.S. and are expected to sign an agreement in March.

Antitrust laws

Antitrust laws have gained plenty of attention as one high-profile case raised questions around the administration's overall standpoint. Last year, the Justice Department blocked AT&T’s acquisition of Time Warner, arguing that AT&T could use its control over programming to harm rivals and impede competition from video distributors, leaving consumers with fewer choices.

The block was surprising in that it marked a significant departure from the department's previous practice of approving so-called vertical mergers in which businesses complemented one another and didn’t compete directly. Many are watching where this case and others land, as they could set a precedent for how U.S. regulators handle other deals in the future.

Deregulation

It’s also worth noting that for every new regulation that could complicate future deals, the Trump administration has pledged to undo a series of Obama-era rules that could also stimulate new transactions. This includes dismantling the 2010 Dodd-Frank law and other financial regulations, as well as easing Environmental Protection Agency rules over greenhouse gas emissions from coal-fired power plants.

Trump has promised to pull the U.S. out of the Paris Climate agreement aimed at combating global warming, which suggests that the nation could be in for an era of deregulation.

Foreign investment reviews

Washington is looking at foreign investment with a more critical eye. Last September, the Trump administration blocked a Chinese-backed investor from acquiring U.S.-based Lattice Semiconductor because of national security concerns.

The move was rare but not surprising given that the U.S. has long protected America’s high-tech industry, especially semiconductors. In 2016, Barack ObamaBarack Hussein ObamaIntelligence for the days after President Trump leaves office Barack Obama sends Valentine's message to Michelle: 'She does get down to Motown' For 2020, Democrats are lookin’ for somebody to love MORE blocked a Chinese investment fund from acquiring the U.S. business of German semiconductor equipment maker Aixtron.

While no new rules have been announced since, it’s likely that some cross-border deals will get more complicated in the years ahead as U.S. lawmakers vet foreign deals more closely.

For instance, a recently proposed bill would stiffen the government’s review of overseas investments, including a focus on personal information of U.S. citizens and a more critical look at joint ventures and other transactions where U.S. technology firms provide intellectual property and technological support to a foreign person.

Immigration reform

Previous administrations have sought to reform U.S. immigration laws, and Trump has publicly made this a cornerstone of his administration. While Congress has yet to agree on a plan, business leaders who rely on the technical expertise and skills from a pool of job applicants abroad are surely watching.

Already, the Trump administration has zeroed its attention on the H-1B visa program, which allows U.S. companies to hire skilled foreign workers. Last December, the administration issued new rules prohibiting spouses of H-1B holders from working in the United States.

This signals there could be more changes on the horizon, and it could become more complicated — and possibly expensive — for companies to hire the talent they need to thrive. However, tighter immigration policies could spawn other deals.

Trump has pledged to tighten immigration further by moving away from a system that historically allowed foreigners with family in America to immigrate to the U.S. in favor of merit-based migration in which foreigners with specific skills are given preference.

All this doesn’t mean there will be fewer deals. Quite the opposite. In the year ahead, we will likely see a rise in megadeals worth more than $5 billion as conglomerates, large corporations and other businesses aim to transform their business to compete in the digital age.

The rules may change, but many companies will continue finding new ways to grow.

Curt Moldenhauer is a partner in PricewaterhouseCooper's Deals practice and the leader of the U.S. Acquisitions practice.