The rise of Donald Trump has confounded political analysts and economists alike. Viewed with scepticism by the markets and lacking any political experience, Trump has brought volatility to an already unsettled market with his protectionist rhetoric and threats to tear up trade deals. M&A activity,dependent upon market confidence, is predicted to fall in this climate of uncertainty. But despite the fears of American isolationism, the UK/US M&A corridor could benefit from a Trump presidency.
Lord Leigh of Hurley, Senior Partner at Cavendish Corporate Finance, the leading UK sell-side M&A specialist, which sells more businesses to companies from the US than from any other country, and who was at the Republican convention in Cleveland, Ohio, earlier this year, below shares his insight into how a Trump presidency could boost inward investment into the UK and potentially ignite M&A activity.
Strong historical and cultural links, the comparable strength of the dollar to the pound, and Trump’s suggestion of a preferential UK/US trade deal all suggest that the UK will continue to be an attractive place for US companies to make acquisitions.
The US has been a global leader in M&A deals in recent times. Last year US companies announced acquisitions worth $1.7 trillion, the highest in 15 years and contributing almost 35% to the record breaking $4.3 trillion spent globally on M&A transactions.Historically, US companies have been keen to channel much of this money into UK businesses, with the US/UK M&A market remaining the largest bilateral cross border corridor in the world by value and by volume.
US companies spent $51 billion on acquiring UK companies in 2015, with the combined US/UK deal corridor amounting to $91 billion, and there are almost two US acquisitions in the UK for every one UK acquisition in the US. Apart from purely commercial reasons, US buyers are also far more comfortable with undertaking transactions under UK law, which is far closer to the US legal system than the legal systems in Continental Europe. Leading US corporate such as Fortress Investment Group LLC, AMC Entertainment Holdings, and Liberty Media Corporation have all made substantial UK acquisitions.
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However, US/UK transaction volumes fell in 2016. A climate of uncertainty has settled on the market due to a slowing Chinese economy, low oil prices, and Brexit, all generating caution amongst investors. As a result, US acquisitions amounted to only $15.4 billion of deals, down from $18.4 billion in the same period last year.
With Trump as President, however, we may expect policies and actions that will energise a slowing M&A market and channel investment into the UK. Trump’s desire to stimulate the US economy by lowering tax rates on US companies and pledging funds to major infrastructure projects will likely coincide with a loosening of regulation which could inject some positivity into the world economy. Large infrastructure projects could lead to cross-border consolidation, with UK expertise and industrial strength offering much to US build schemes.
The announcement of Trump’s success resulted in relatively benign market fluctuations with the US Dollar Index up more than 2% since the election and making sterling-based purchases attractive. Whilst many M&A deals are part of long term strategies, the weak pound will increase the probability of such transactions being completed and allow buyers to capitalise on the transactional benefit of weak Sterling by achieving faster returns.
Any decline in the competitiveness of American exporters may be balanced by Trump’s promise of a repatriation tax break, promising to cut taxes on funds US companies have stored outside of the country to 10% which could increase outbound deals. US companies have a total of $1.3 trillion in overseas funds. The 35% US corporate tax rate has troubled Trump, making businesses less attractive in domestic markets, and so the prospect of diversifying their company assets by buying UK companies could increase inward investment.
Also, in the UK, HMRC is focusing more on abuses of transfer pricing and this is likely to prompt subsidiaries of US companies in the UK to book more profits here. This could also lead to more US companies using these earnings to target and increase UK acquisitions.
Trump’s rejection of NAFTA and TTP, on the grounds that US companies lose out to under-performing foreign businesses, could result in a new bilateral trade treaty between the US and the UK. Brexit has weakened the significance of TTIP, given that its main attraction for the US was that it included free trade with Britain. With a general rise in political hostility to trade deals between the US and the rest of the world, it is likely that Trump will look to secure ties between countries which offer the most advantageous benefits and culturally similar values to the US. Indeed, during my visit to the Republican convention earlier this year I encountered great enthusiasm amongst delegates for a UK/US trade deal and calls that this should be made a priority.
For US investors looking to duplicate their business models outside their domestic markets, the UK remains an attractive location. The two countries share much in terms of market fundamentals, with similar business and legal environments, and so it makes sense for businesses to deploy their funds in a market that investors believe they understand.
Similarly the technology, media and telecommunication sector continues to drive US/UK deals, with over 25% of M&A takeovers involving TMT companies and assets. What is relevant within the US is equally applicable within the UK and, as tech companies operate in a dynamic sphere, M&A is much more valuable and critical to a firm’s success. With possible restrictions on visas for US based companies, businesses may look to capitalise on the wealth of talent in the UK and the benefits of operating in the world’s biggest tech hub.
Whilst it is impossible to predict the direction a Trump presidency will take, ultimately a Republican president will be more pro-business and light regulation. As Trump wrote in his 1987 bestseller The Art of the Deal: “The worst of times often create the best opportunities to make good deals”.