With implications for nearly all facets of Americans' daily lives, the election will dominate headlines for weeks to come. But does it matter to the M&A market?
Here, John Neuner and Bob Baltimore, managing directors and co-heads of M&A at Harris Williams, share how past experience, current conditions, and ongoing innovations in the marketplace shape their view of the road ahead.
How should buyers and sellers be adjusting their plans due to the upcoming election?
Neuner: There is plenty of liquidity now. Companies not directly impacted by COVID-19 are performing well and valuations are strong, so it's a great time to be getting deals done. No one has a crystal ball to see how the election will change things, but looking back at past years, we don't see a strong correlation between elections and the M&A market (Figure 1). So, on the whole, if the economy continues to recover, we expect M&A to be healthy.
Baltimore: Going back to 1985, we see some limited shifts in timing due to elections, but not in deal count, which instead is linked to where we are in the business cycle. We've had great M&A markets under both Republican and Democratic administrations over that time period. That being said, the market likes stability and clarity. During an election, the rules have the potential to change, and over the years we've seen people delaying or accelerating deals accordingly. We expect that uncertainty to be highest in the period immediately following the election. There may be a short pause in deals during that period, but we also think lenders will still want to do deals—especially direct lenders.
Neuner: What's interesting is that this year seems to be bucking the longer-term trend. Going back to the 1980s, you can see a slowdown in the third quarter of an election year as people put deals on hold (Figure 2). Then things tend to bounce back following the election. This year, the pent-up demand due to COVID-19 and the current favorable conditions for deal-making are driving buyers and sellers to try to wrap deals up sooner rather than later.
Neuner: It's important to point out that the M&A market has changed dramatically over the past several years, with new pools of capital creating more options for sellers. Private equity, patient capital, family offices, long-dated funds, infrastructure funds, SPACS, and minority capital providers have all seen tremendous growth. At the same time, strong public market valuations have helped strengthen strategic buyers. All of this combines to create more options in how deals get done and more paths to success for sellers. That proliferation of options—coupled with low interest rates and liquidity in the marketplace—is driving owners of great companies to the market regardless of the election.
We have a 30-year history of working creatively with clients to achieve the best possible outcome. Today's marketplace gives us more ways to do that than we've ever had before, from single-asset vehicles to new buyer types with different time parameters and return expectations, to the thoughtfulness that we're seeing in private equity firms looking to drive growth at the company level.
We were on a call with a repeat client recently, and we were talking about this very dynamic. Years ago, we would have defined success in terms of value and economics. Today, we’re looking at a whole new range of goals. What kind of functional expertise do you want? Do you want a partner with expertise in international markets? How much dry powder do you want to keep on hand for acquisitions or other growth initiatives? What is the best cultural fit for you and your team? How long do you want to own the company? And because of the optionality we now have, our team can quickly identify the right partners for a particular company.
Baltimore: Another important factor is the long-term perspective on interest rates, driven by the Federal Reserve, which has created a favorable market for investors using leverage. Rates are at an all-time low and are likely to stay there for some time. This has created an economic incentive to put that inexpensive capital to work, and the M&A market provides plenty of opportunities to generate strong returns for investors.
To John's point, we're much more focused on putting all the options to work for our clients than we are on the election. We'll be paying close attention to the outcome and all of its implications for M&A, but overall we're optimistic. There will always be upsides and downsides of any election, but the fundamentals of this market position our clients and us well for long-term success.
Published October 2020