The COVID-19 pandemic continues to have a widespread impact on the U.S. markets and economy. The previously booming M&A market has sharply receded. In the United States, deal volume has seen a staggering decline in the first quarter of 2020, falling about 50% compared to the same time period last year, according to Dealogic. Some elected officials would like to see it stay that way.
In the U.S., Senator Elizabeth Warren (D-MA) and Representative Alexandria Ocasio-Cortez (D-NY-14) as well as House Antitrust Subcommittee Chairman David N. Cicilline (RI-01), have called for forms of “merger bans.” While many regulators in Europe have expressed a view that they’ll take aggressive action to stop M&A.
Their message is loud and clear – now is not the time for deals.
But proposed legislative bans on mergers, led by the most progressive members of the Democratic party, have no real path to becoming policy today. As a result, those involved in the M&A space have largely dismissed these proposals as political bluster.
This is a mistake. Politicians do not need to make policy to have an impact, as “noise” alone can pose major challenges. These proposals are merely the latest indication that challenging M&A is increasingly seen as good politics, a broader trend where a focus on Big Business is being used to score political points in presidential and congressional election years.
Even prior to the pandemic, the past few years of dealmaking in the United States featured increasing political attention. Antitrust reform became a focus of the Democratic party. Remarks from CFIUS and elsewhere became powerful statements on national – and nationalist – priorities. Letters from Senators declaring deals should be blocked became routine. More and more corporate executives were called to testify in front of Congress. State attorneys general (AGs) began to take extraordinary new steps and public utility commission reviews grew in significance. A study by Gartner found that the duration to close a transaction has increased 30% since 2010.
It is time for dealmakers to take a broader view in addressing and mitigating the impact of political scrutiny on M&A. Here are some key considerations for how to manage political risk.
- More Deals in the Spotlight. M&A and politics used to have a simple rule of thumb: large deals with notable brands equaled political scrutiny. The growing anti-merger momentum among politicians suggests that the aperture is widening. Expect companies in consumer-oriented markets to gain more scrutiny for bolt-on buys, asset divestitures or other non-transformational transactions.
- Regulators Mindful of the Atmosphere. While elected officials have few direct powers to affect mergers, by raising attention on a transaction they can cast powerful influence over the regulatory review process. Primary regulators are not immune to politics. Vocal criticism from lawmakers can only muddle the already opaque federal deal review process. The political atmosphere matters and it has become harder to quickly approve a deal that is seen as controversial. The more a deal is in the spotlight the more likely a regulator is to ask more questions, propose remedies or just take more time in the process.
- Noise Attracts Newcomers. The positive political feedback loop on criticizing M&A is extending the gauntlet deals need to run to achieve approval. Most notably, state AG’s have taken a far more active role in reviewing and even challenging transactions. We expect that other regulators will also see value in more active (and more public) scrutiny of deals.
- Rising Value of Employees and Communities. Transactions inevitably create some sort of uncertainty for employees and local communities, which has a very real and direct influence on political scrutiny. Dealmakers should start considering how to more forcefully address these audiences in announcement communications. Messaging highlighting the upside for shareholders (incl. cost synergies) must be tempered against the appearance of a deal being destructive for other stakeholders. Companies – and investment firms conducting buyouts especially – should consider issuing assurances (when feasible) that might not be part of a typical deal announcement. These tactics might include: a commitment to no layoffs through a certain date; pay and benefits protection; and new community initiatives.
- Goodwill Beyond the Balance Sheet. Corporate decisions made and actions taken today can go a long way to support a future M&A announcement. Perceived missteps that are left unaddressed with elected officials and regulators can lead to hardened opinions that incentivize scrutiny when a transaction thrusts a company back into the spotlight. Increasingly, employees are organizing and speaking up about their employers’ actions (or lack thereof) and we expect that elected officials would be eager to listen.
In this environment – and especially as the 2020 U.S. elections continue to heat up – some legislators are more than ever waiting in the wings to pounce on any deals that might appear to favor shareholders more than other stakeholders. And they certainly don’t need legislation to make an example of a company and drag a deal through political mud. The politicization of M&A has become inevitable. The risk calculus of political attention has increased from a possibility before to a likelihood today.
Pat Tucker is Managing Director, Head of M&A and Activism at Abernathy MacGregor, where he frequently advises public and private companies on through transactions including those involving interloping bidders, complex structures, antitrust review, cross-border and foreign ownership review challenges, and special committees. Pat’s recent transaction experience includes advising T-Mobile in its acquisition of Sprint, Intuit in its pending combination with Credit Karma and IFF in its pending merger with DuPont’s Nutrition & Biosciences business.
Eric Bonach is a Senior Vice President at Abernathy MacGregor, where he provides strategic communications counsel to companies involved in transformative and special situations, including shareholder activism defense and proxy contests, mergers and acquisitions, unsolicited takeovers and corporate crises. Eric’s recent transaction experience includes advising U. S. Steel on its acquisition of a 49.9% interest in Big River Steel, San Jose Water Group in its acquisition of Connecticut Water Services and defense against Cal Water hostile tender offer, and TPG in its acquisition of Accel Entertainment.
Jake Yanulis is a Vice President at Abernathy MacGregor, where he counsels clients on a variety of special situations, including mergers and acquisitions, restructurings and shareholder activism. Jake’s recent transaction experience includes advising T-Mobile in its acquisition of Sprint, IFF in its pending merger with DuPont’s Nutrition & Biosciences business and Keurig Green Mountain in its merger with Dr. Pepper Snapple Group.