This isn’t exactly what corporate America expected under a president who built his reputation on The Art of the Deal.
The pace of mergers and acquisitions slowed in the second year of President Trump’s administration, for the first time in nearly a decade, amid political upheaval in Washington and Europe, combined with the fallout from trade disputes that have left executives wary of investing capital.
The number of mergers dipped 3.7 percent to 19,232 worldwide, while dropping 1.4 percent to 5,718 in the U.S., according to Mergermarket, which tracks global dealmaking. The outlook for this year is even dicier, with Britain’s troubled departure from the European Union, Washington’s high and potentially mounting tariffs on China, and a government shutdown that has slowed regulatory analysis of deals all posing challenges.
The Justice Department’s antitrust division and the Securities and Exchange Commission are both operating with limited staff, while the Federal Trade Commission has closed its offices.
“If we don’t see the ability to get approvals from the SEC on initial public offerings and, to a lesser extent, some of the merger-and-acquisition deals that need approvals from government agencies, it will be problematic” for the market, said JPMorgan Chase Chief Financial Officer Marianne Lake. “It’s one of many things that would behoove us to end this sooner rather than later.”
Indeed, the merger market’s obstacles from the shutdown are only a portion of total costs that are shaving as much as $1.2 billion a week from U.S. economic growth, S&P Global Ratings estimated. “The longer this shutdown drags on, the more collateral damage the economy will suffer,” said Beth Ann Bovino, the firm’s chief economist for the U.S.
Trump, however, has stuck to his argument that refusing to sign any government funding bill that doesn’t include $5.7 billion for a barrier along the southern border is necessary to maintain U.S. security.
“People that aren’t getting a payment, that aren’t being paid, have let us know in the strongest of terms — a big amount — they said, ‘Sir, what you’re doing is of paramount importance,'” he said at the American Farm Bureau Federation’s convention in New Orleans in mid-January. Simultaneously, he promised that the trade deals he’s negotiating, with countries including China, will benefit agriculture and other U.S. industries.
Until the U.S. dispute with China is resolved, however, it’s casting a pall over potential mergers and acquisitions. While Trump and President Xi Jinping agreed to a 90-day truce for talks, Washington has already imposed duties on some $250 billion of Chinese goods and Trump has threatened to more than double some of them to 25 percent if no deal is reached by March 1. He may also tack duties on to another $267 billion in imports.
“There’s always uncertainty, but this uncertain time is not like other uncertain times,” Elizabeth Lim, a senior research analyst with Mergermarket, told the Washington Examiner.
In just the first week of 2019, Apple blamed slowing growth in China, hurt by Trump’s tariffs, for a gloomier sales outlook. Revenue in the last three months will be about 10 percent lower than the Cupertino, Calif.-based company’s earlier forecast of as much as $93 billion, CEO Tim Cook said in a letter to investors.
“If that can happen with Apple, one of the most successful American companies globally of all time, you can only imagine what’s going to happen to other companies,” Lim said. “It’s not pretty.”
Acquisitions of American companies by Chinese firms plunged 94 percent in 2018 from a record high of $55.3 billion in 2016, Mergermarket noted.
To be sure, outsize acquisitions continued in 2018 and the average deal size worldwide was $348 million, just below the peak of $400 million in 2015. Goldman Sachs, the Wall Street investment bank that topped deal rankings worldwide, saw revenue for that business climb 10 percent to $3.51 billion.
“There has been quite a disconnect between the weak market sentiment and the optimism we continue to see in corporate boardrooms,” Goldman’s new CEO, David Solomon, told investors. “Corporations continue to seek advice for strategic transactions, and there’s a need for both equity and debt financing.”
Conflicting U.S. regulatory actions in two blockbuster transactions, AT&T’s $85 billion takeover of Time Warner and CVS Health’s $69 billion purchase of insurer Aetna, may nonetheless disrupt potential mega-mergers, Lim said, leaving buyers and sellers uncertain about how to gauge the risks in such combinations.
The federal judge who allowed AT&T to complete its purchase of Time Warner despite the Justice Department’s objections, Richard Leon of the D.C., later decided to take a closer look at the CVS purchase that regulators had allowed to move forward.
“There’s a lot of confusion about what 2019 is going to look like and how subsequent U.S. megadeals will be treated,” Lim said. “If we as analysts are looking at that and we can’t predict what’s going to happen next, what the rule of thumb will be, then how will a dealmaker feel who has a lot of skin in the game?”
