M&A update: pushback on hostile regulation

Trump administration promises to block regulatory overreach

Are we about to enter an merger and acquisition (M&A) super cycle? President Donald Trump’s return to the White House with a clean Republican sweep of the House and Senate is expected to usher in a wave policy changes that could unlock the flood gates on pent up M&A activity.

M&A has been on the rebound this year after two consecutive years of declining volumes, with 2023 recording the lowest level of activity in a decade. Global M&A activity totaled nearly $2.7 trillion through mid-November, up 9% from the same period last year.¹ While the regulatory environment has remained a key hurdle for dealmakers, declining interest rates, improved deal financing conditions, strong equity markets, and rising boardroom confidence have driven a recovery in M&A this year.

With Trump expected to appoint new leaders at federal regulatory agencies, the market anticipates a friendlier environment for dealmaking is ahead. Market participants expect the incoming administration’s more pro-business agenda and the potential for corporate tax cut will also be a catalyst for M&A.

Brighter outlook for M&A

The Biden administration’s executive order announced in July 2021 had the stated purpose of promoting competition, but in fact enabled their regulatory agencies to take hostile and unprecedented actions to block consolidation and merger activity, which had a cooling effect on M&A. This hostile regulatory mandate enforced by Biden appointees at the Department of Justice (DOJ) and Federal Trade Commission (FTC) made for an unpredictable and challenging deal-making environment, leaving many acquirers on the sidelines.

A recent example of this hostile regulatory regime is the merger of Capri Holdings Limited by Tapestry Inc which was challenged by the DOJ and FTC and taken to court. Despite operating in the highly competitive consumer handbag market with considerable competition and limited barriers to entry, the companies lost in court and the merger was ultimately terminated. This illustrates the hurdles for M&A and merger arbitrage over the past few years. The second Trump administration is expected see a rollback in regulations, a more activist friendly SEC, and potential tax cuts, an environment primed to boost M&A.

Outlook and investment implications

Markets stalled going into the election with the S&P 500 down 0.9% in October with the Nasdaq down 0.5% and the S&P/TSX up 0.9%, while the Russell 2000 was down 1.4% for the month.

As inflation continues to soften in both Canada and the U.S., central banks have signaled a path for interest rates to continue receding. With the U.S. election over and the Trump administration set to take over in the new year, we believe there is a compelling backdrop for M&A activity and merger arbitrage strategies going forward. Strong equity markets, tight credit spreads, declining interest rates, record dry powder on corporate and private equity balance sheets, and improving sentiment are all supportive of rising M&A activity.

With the policy and appointee changes set to occur under the new administration, headwinds that have impacted M&A over the past several years are expected to shift to tailwinds. This is a view that has been reaffirmed by leading bankers and advisors who have indicated that many of their clients who have been waiting on the sidelines now see an opportunity for dealmaking.

We believe merger arbitrage is particularly well suited for this environment with its low correlation to other asset classes and spread over interest rates. Short-duration fixed-income investments are likely to face headwinds from declining rates, while long-duration fixed income have uncertainty, given the balance of short-term rate cuts and longer-term inflationary impact of some of Trump’s policies. With tailwinds in place, merger arbitrage is an attractive low risk, tax-favorable liquid alternative strategy to protect and diversify your portfolio.

Notes

1. LSEG Global Mergers & Acquisitions Review – First Nine Months 2024 | Financial Advisor

Amar Pandya, CFA, is Portfolio Manager of the Pender Alternative Arbitrage Fund and the Pender Alternative Special Situations Fund at PenderFund Capital Management. Excerpted from the Pender Alternative Arbitrage Fund, Manager’s Commentary, October 2024. Used with permission.

Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in net asset value and assume reinvestment of all distributions and are net of all management and administrative fees, but do not take into account sales, redemption or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter and is provided for your information only. Every effort has been made to ensure the accuracy of its contents. Certain of the statements made may contain forward-looking statements, which involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Image: iStock.com/cyano66