I’ve been talking to some of my banker friends* about their thoughts on the M&A market for 2017 under the new Trump administration. The general consensus is that there will likely be more M&A this year for the following reasons:
1. The Trump administration is projected to be very business friendly and will likely take the following steps that will lead to more cash in hand for larger corporations:
- Repatriation of cash trapped overseas in low tax jurisdictions. The idea here is that companies have cash in low tax jurisdictions that they do not want to bring back to the U.S. due to our corporate tax rate being higher than where they are generating the cash (in 2016, the U.S. had the third highest corporate income tax rate in the world). If the U.S. lowers its corporate tax rate, the idea is that these companies would bring that cash back to the U.S. and invest it in projects here. If Trump is able to influence corporations to invest that money back into the U.S., some of it will be used for acquisitions.
- Cheaper to borrow right now. Following the financial crisis, interest rates were lowered in order to stimulate corporate borrowing, this ushering in extremely low interest rates for when companies borrowed cash to make acquisitions. With the improvement of the economy, the Fed is starting to raise interest rates again, which will make it more expensive for companies to borrow money for acquisitions. So companies will look to borrow and acquire now before rates get high.
- Reducing regulation. If you look at Trump’s nominees thus far, they all seem to be pro-business and anti-regulation. Regulation is effectively a tax on an organization (it costs companies money), and reducing regulation means companies will have more to spend on other things, one of which is M&A. I won’t discuss the long-term repercussions of that here.
2. Venture Capitalists are hopeful for higher M&A and IPO activity this year as always, but this year is critical. Many large VC firms are on a two-year fundraising cycle and raised new funds in early 2016. This means they will be back in the market in 2018 and will need to show significant results before that. Many firms are are already predicting such outcomes for higher IPOs and M&As this year.
3. 2016 tech IPO count was down more than 30 percent from the paltry numbers in 2015. Companies are waiting for the right time, and the pressure is on for some companies that have filed their S-1s but haven’t gone public yet. Also, for companies that have raised a lot of capital already, the investors might be getting impatient.
These factors will push up overall M&A and IPO activity in the short term.
*Thanks especially to my friend Sherman Williams for help with this post.
Shruti Gandhi is a managing partner at Array Ventures investing in deep tech verticals such as AI/ML, big data, security, and AR founded by “agitated” entrepreneurs that are working hard to reinvent enterprise solutions. She was previously with True Ventures, Samsung’s Early Stage Investment Fund and had three successful exits. Follow her on Twitter @atShruti.