Neil Patel

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Understanding how to navigate M&A during election season is crucial for dealmakers, M&A advisors, and other entities. This in-depth expertise and knowledge is particularly relevant in 2024, a notable year in which more than 64 counties are going to poll in their national elections.

Changes in the administration will result in drastic policy changes. If you’re considering cross-border deals, understanding how the policies impact regulations, taxes, HR, and other aspects becomes crucial. Aligning the aspects with efficient integration is essential to ensure the transaction’s success.

Countries participating in this most significant democratic activity will likely demonstrate new trends and operating strategies. These trends will reflect across the board in social, economic, and political spheres, ultimately impacting how people do business.

The US economy has the most significant impact on global financial markets. High interest rates, high inflation, and other challenges transfer to other countries. The ongoing geopolitical conflicts, such as the Russia-Ukraine and Israel-Palestine wars, also impact M&A deals.

Stable political conditions and policies improve overall business sentiment, and more dealmakers are willing to finalize transactions. They leverage strategic deals to scale companies and enhance profits and revenues. Fundraising activity ramps up, with investors more confident about earning returns.

Historical data shows macroeconomic trends like uptrends, recovery, and downtrends impact M&A deals. However, the number of transactions and company valuations may also dip right before the presidential elections.

Understandably, dealmakers prefer to wait for the election results to develop an understanding of the future business landscape. They can plan business strategies accordingly.

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M&A During Election Season – Let’s Check Out Some Statistics

Looking back at historical trends since 1996, the number of deals and their values are typically 8% to 10% lower. These dips are noticeable during the presidential election years. The impact is more significant on the lower end of the middle market.

Deals and transactions are put on hold because of the overall uncertainty about the congressional makeup after the elections. The election results and the regime coming into power will likely institute changes in policies and regulations. Dealmakers anticipate disruptions in the economic sphere.

Since 2022, M&A deal volumes in the middle market have been low due to several factors. These may include geopolitical conflicts, high interest rates, and buyers and sellers disagreeing on the expected deal valuations.

Substantial Reserves of Unused Capital is Available in 2024

Deal activity dropped even further in 2023, but not because of the lack of dry powder available with VCs. In fact, private equity funding reserves were close to $3T and stabilized in mid-2023. Strategic dealmakers and buyers had adequate cash on their balance sheets, ready for investment.

Stable interest rates in mid-2023 contributed to reserves reaching an all-time high. By 2024, investors were looking for viable projects to back. Further, private equity firms were incentivized to liquidate their portfolio assets and deliver returns to their stakeholders.

Regardless of the high interest rates, the economy remained strong, with mid-market companies demonstrating steady growth. Other challenges, like the higher costs of accessing capital, hiring and retaining employees, and purchasing insurance, did not hamper growth.

As a result, the year 2024 is reversing the trend. Statistics show a 36% increase in the global deal values in Q1, which is 51% to 53% higher than during the same period in Q1 2023.

Further, the time needed for advisors and dealmakers to complete due diligence has also decreased. They take an average of 10 days less than around the same time in 2023. This could be because dealmakers are anxious to complete transactions quickly before the elections start off.

However, closer to the election dates, M&A deal volumes may taper off. Acquirers and sellers become more risk-averse and are willing to put deals on hold until after the elections. Valuations, interest rates, and funding for the deals are reliant on the new policies. Delaying deals is advisable.

Because of the favorable market conditions, experts anticipate that the “wait-and-see” approach will be only temporary. M&A during election season is slow but will ramp up quickly in the two quarters following the elections. Disruptions in deal volumes are likely to be temporary.

What Happens Post Elections

Once the elections are over and the new government comes into power, M&A activity resumes. Dealmakers can resume regular business now that they are aware of the latest economic, foreign, and taxation policies. They can make decisions aligned with the new rules to ensure profits and growth.

Although this should be the obvious way business progresses, historical statistics indicate otherwise. M&A deal value in the US has dropped in the interval between the election date and the year’s end. This phenomenon has been noted across the previous seven election periods.

Only two instances have occurred where the values of M&A deals after the elections exceeded those during the campaigning months. In other words, there are no clear precedents on which to base assumptions about what can happen after elections.

On the one hand, substantial dry powder reserves with private equity firms left over from 2023 may encourage more deals. Investors and acquires are anxious to identify new investment opportunities that can deliver profits.

Deals should increase as more buyers and sellers align their valuation expectations. On the other hand, geopolitical instability and government policies designed to secure domestic markets could prompt changes in strategic decisions.

Dealmakers may choose to lower their risk exposure and opt out of cross-border transactions. Their focus could shift to deals across states or cross-country to take advantage of incentives. Support may also move to more stable verticals where volatility is low.

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How Government Spending Boosts M&A During Election Season

The “electoral theory of spending” says that government spending ramps up during the presidential election year. This happens because the newly elected officials are dedicated to backing the projects their candidates and/or parties support.

Government spending also increases before the elections since officials are uncertain about the results. They may want to support ongoing projects to ensure their continued success even after the elections. As a rule, government spending increases during and up to one year after the elections.

This spending boosts M&A during election season and afterward, particularly in verticals such as engineering, technology, cybersecurity, and space. Developing infrastructure, life sciences, and research facilities are other industries and services that the federal government backs.

Projected Federal Reserve Rates and Policies

Projections and estimations of Federal Reserve interest rates post-election can spur increased M&A deal volumes. As dealmakers, private equity firms, and venture capitalists expect interest rates to drop, global deal volumes have risen.

Statistics show an increase in the number of M&A deals by 22.5% by early March 2024. Compared to the first week of March 2023, deal volumes surged by 55% and were valued at over $601B.

Also, the number of M&A deals valued at more than $10B increased by 300%. Buyers and sellers expect inflation to drop, corporate profits to rise, and the stock exchange to be robust.

Fiscal policies are also less stringent in countries outside the US during their election years. This relaxation in regulations impacts cross-border transactions and benefits dealmakers looking to make acquisitions there.

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What’s Different About 2024 Elections

Unlike elections in the preceding years, there’s likely less apprehension about the economic policies and landscape of 2024. That’s because both candidates are well-known and have completed terms.

The corporate world is familiar with their policies and doesn’t expect any radical changes in the legislature. However, specific policy changes may prompt investors to exit their holdings and sellers to exit their companies.

Taxation Policies

The Biden administration intends to implement several reforms to reduce unemployment and create jobs. However, taxation policies are a different matter. The priority is to scale back the enormous tax breaks big corporations received in 2017.

Although the new tax percentage hikes of 21% from 15% are still lower than before 2017, they will impact businesses’ bottom lines. The administration will also crack down on tax evasion practices and reform the international tax system.

High-net-worth individuals and families may also have to pay a higher corporate tax rate of 39.6%. This tax rate is applicable if they earn more than $1M annually. Corporate executives and members of the management receiving high compensation packages must also pay higher taxes.

Corporations may feel the impact of the Inflation Reduction Act, a tax on corporate stock buybacks. This act lowers the tax advantages of buybacks over dividends and prompts companies to invest in their growth and productivity.

The act raises the tax on stock buybacks from 1% to 4%, which discourages companies from transferring tax-preferred profits to foreign shareholders. Another factor is that the tax cuts instituted by the Trump administration are due to expire in 2025.

Experts also estimate that his projected policies may raise unemployment and inflation. These anticipated changes may spur M&A during election season, as people take advantage of the lower tax rates and want to complete deals before the taxation system changes next year.

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Other Contributing Factors

As dealmakers and advisors prepare for the election results, experts estimate that the M&A market could be stronger than ever. Several factors, such as the possibility of lower Federal Reserve tax rates and substantial capital reserves, continue to promote growth and profitability.

Financial and strategic dealmakers are ready to deploy capital into the market, and their concern is more about macroeconomic conditions. Their focus is also on the individual company’s metrics and performance and the overall industry’s conditions.

Due diligence strongly centers around financial and operational numbers that indicate the company’s viability, scalability, and long-term profitability. Companies that demonstrate potential for long-term growth with recurring revenues have a better chance of attracting investor interest.

Overall, regardless of which administration will dictate policies, experts expect the policies designed to curb inflation rates. They also expect regulations to boost the national economy with a focus on promoting productivity on the home ground. Lowering unemployment is also a priority,

All of these factors are certain to improve the business environment. This anticipation has spurred M&A during election season.

In Conclusion

The year 2024 is a historical year with the world poised for radical changes in economic polices. Since economies in the 21st century are going global, policies and regulations are likely to impact trade and business activities.

M&A activity in the US is correlated to the world however, thanks to the overall market optimism. Deals and transactions have had a promising start in 2024. Also, familiarity with both parties in the US elections has reassured dealmakers that policies may not change drastically.

Players in the M&A market are keeping a close watch on the frequent updates about the presidential elections in 2024. The business landscape cannot stay immune from the policies that the incoming administration may institute.

However, market sentiment is strong, and dealmakers are more focused on industry-specific trends. They are also likely to conduct extensive due diligence when assessing potential candidates for acquisitions or funding.

The ultimate objective is to acquire companies that demonstrate a strong potential for long-growth forecasts and robust financials. Other essentials of a typical pitch deck, such as the team, customer base, product-market fit, and business plan, are crucial.

These factors will continue to influence M&A during election season. Another incentive is the availability of capital reserves that investors are willing to offer. Policy changes could be a defining factor that tests the company’s resilience and ability to adapt to changing political conditions.

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Neil Patel

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