There are undoubtedly many economic challenges the winner of the 2008 presidential election will have to face, and with the candidates' two very different economic policies, the outcome of the election is certain to impact the M&A environment. To get some insight on potential M&A trends depending on the election's winner, Dealscape turned to Jeff Bistrong, a managing director for Harris Williams & Co.
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Bistrong believes that irrespective of who is elected there will be
a down cycle with the greatest challenge being the existing
liquidity crisis, since neither the Democratic or Republican parties
have a short-term plan to encourage lending in the marketplace.
Bistrong said he doesn't expect to see liquidity in the marketplace until the
first quarter.
On a longer-term basis a President John McCain or Barack Obama faces major hurdles. "Each
candidate has his own challenges," Bistrong said. "Obama's challenge will be to
transform lofty goals into economic growth. McCain's challenge is to
move forward with a platform not dissimilar from his predecessor's,
while at the same time moving the economy into significant GDP growth."
And it's over the long term that the winning candidate could most impact the M&A marketplace, said Bistrong, who outlined the differences between Obama's and McCain's policies.
If Obama wins it could mean less large corporate deals and more deals in the middle market because:
- Corporate
taxes will increase ("not dissimilar to the 1990s," he said), which
reduces profitability of corporations and high-net-worth individuals.
- Corporate
return on investments will be impacted, but since the middle class will
benefit consumer spending could make a turnaround.
- The M&A activity driven by private equity will be negatively impacted from rising capital gains.
- More
protectionism concerning international trade to protect American jobs
could have a negative impact on growth of corporations.
"Large deals are very negatively impacted right now, and there is not a
lot of debt availability," Bistrong added. "Strategics are likely to do small
acquisitions and less transformative acquisitions in this environment.
Private equity groups are not able to put together the debt financing
they used to do form many large corporate strategics so they are
going to look toward the middle market, and there will be increased activity in distressed M&A."
A McCain win's impact on large corporate deals and middle-market M&A is likely to include:
- Corporate taxes will remain at the levels they are now, benefiting corporations.
- Capital gains will remain low, and will be more conducive to private equity.
- There will be a less aggressive regulatory environment, potentially allowing more deals to take place.
- There could be less friction in economic growth because it will be business as usual.
- Less protectionism and an international open market perspective.
"Maintaining
the current low levels in corporate taxes and capital gains would
be a plus, although it's business as usual from that perspective. If McCain
prevails it will be more conducive to private equity and to
corporations because there will be less tax, protectionism and
regulation. If the Republican party were to prevail there will be a
maintainance of; and not a newly inspired platform for change."
Bistrong speculated that irrespective of who is elected there will be healthy
M&A activity in the middle market and primarily in certain sectors.
"Technology and software companies, which are delivering solutions that
drive efficiency are doing well in M&A and in valuation," Bistrong
said. These companies are in sectors such as healthcare, logistics,
energy, and technology and healthcare combined.
- Maria Woehr
Comments
And what about the plans to treat carried interest as ordinary income? No single act is more likely to be as destructive to private capital markets. Private equity has been a driving force in recent markets. If tax rates to general partners are to triple, I would not expect talented individuals to continue taking risk.