Commentators have observed that this could be the most consequential election of our lifetime. What should we expect if Biden wins? How would M&A be impacted?
Cutler: New administrations bring with them new policies, and these policies can generate or inhibit new avenues for M&A. Under the Trump administration, corporate tax reform and other tax cuts that facilitated repatriation of overseas capital facilitated dealmaking as strategic companies and financial sponsors alike sought new opportunities. If Biden were to win the presidency by a landslide – something we haven’t seen in a U.S. presidential election in almost 40 years – he would have the political capital to pursue the most ambitious aspects of his agenda. And, if the Democrats manage to flip the Senate in their favor, there will be increased latitude through which to implement the Biden administration’s regulatory regime – with the most pressing remaining question centered around which initiatives a Biden administration would prioritize.
Curtin: Elections are important, clearly, and the M&A community recognizes that a Biden administration would introduce meaningful changes in policy. Even so, the proposals articulated by Biden do not appear to be so extreme as to overcome the considerable momentum, sound business fundamentals, and technology imperatives that have driven M&A transactions to record levels of volume and value over the past ten years. With corporations enjoying healthy balance sheets, the significant deployable cash stockpiled at private equity firms, and the availability of low-cost capital, business enterprises are prospering from practicing balance sheet discipline and seizing upon transactional opportunities, notwithstanding the pandemic. Barring a dramatic shift in governmental policies or road blocks to M&A, which are not anticipated under a Biden administration, M&A activity should continue to enjoy sustained growth.
What are some of the major differences between what we have seen during the Trump administration and what would emerge under a potential Biden administration? How might those differences influence dealmaking?
Cutler: Tax rates on high earners will increase if Biden wins. Trump lowered the corporate tax rate from 35 percent to 21 percent during his term in office. Biden’s economic plan calls for raising the corporate tax rate to 28 percent. Under current law, carried interest held at least three years is taxed at rates applicable to long-term capital gains. Under Biden’s proposal, all capital gains for taxpayers with an income of at least US$1 million, regardless of holding period, would be taxed as ordinary income (generally at the highest income tax rate). The benefit of a lower rate for carried interest would thus be eliminated for all high earners. Eliminating the tax incentives for carried interest in this manner could reduce the level of risk PE firms are willing to incur in connection with proposed M&A transactions. There is also the possibility that any tax increase enacted under a Biden administration might apply retroactively to the start of 2021 – something that hasn’t happened since the first Clinton administration in the early 1990s. In response, a number of companies involved in tax-sensitive transactions are under pressure to complete deals prior to January 1, 2021.
Curtin: With Trump, we’ve also seen a meaningful rollback in the expansive regulatory architecture implemented during the Obama-Biden administration. Under a Biden administration, regulatory activity will increase, especially in the environmental space. Increased regulation can inhibit M&A activity to the extent that transacting parties need to address the potential for additional costs and delays associated with a sale, acquisition, or other investment. Broader regulation also can affect valuations and prospective synergies for strategic buyers. Historically, the specter of additional regulation has been viewed as a deterrent to dealmaking. Some of the burdens associated with additional regulation may be mitigated by actions taken in the private sector, such as increased investment in clean energy by PE firms and traditional energy companies in anticipation of Biden’s climate initiatives.
How would you characterize antitrust review under President Trump? Would antitrust review change under a President Biden?
Curtin: M&A thrives in an environment of predictability, but the actions taken by the Federal Trade Commission and the Department of Justice under the Trump administration have not always been predictable when enforcing antitrust law and regulation. Federal agencies within the Trump administration have leveraged regulatory mechanisms, including antitrust litigation, to promote Trump’s economic agenda, which has been more protectionist in orientation than the economic agendas promoted by his Republican predecessors. As a result, the Trump administration has been surprisingly active in its opposition to a number of large transactions, including notably AT&T/Time Warner, which might otherwise have been assumed to be supported by a pro-business Republican executive branch. In a number of high-visibility proceedings, federal courts, including those with Republican-appointed judges, have not sided with the positions taken by the Trump administration.
Cutler: Under a Biden presidency, we would expect heightened antitrust oversight and investigations – both of vertical and horizontal mergers – that is often associated with Democrat administrations. Given some of the surprising antitrust positions taken under the Trump administration, however, transacting parties might experience a less extreme shift in review by the FTC and DOJ than can sometimes occur following a transition from a Republican to a Democrat executive branch. Because Biden’s campaign has not focused on antitrust policy to the same degree as other Democratic candidates, the M&A community will be well-served to pay special attention to the next generation of leadership at the FTC and DOJ and where they fall on the spectrum of progressive views of competition enforcement and policy.
What economic drivers will the next president – regardless of who wins – have to navigate?
Curtin: Up until the emergence of the pandemic in March of this year, the United States was enjoying an economic expansion that, if not for COVID-19, would be in its second decade. The next president will face a difficult balancing act between taking steps to revive the national economy while implementing policies to counter a second wave of COVID-19. Promoting an expansive economy while adopting appropriate public health measures will be the most acute challenge faced by the next occupant of the White House.
Cutler: The next president and Congress will have to find a way to help millions of Americans recover from the pandemic-induced economic slowdown. Although Secretary Mnuchin and Speaker Pelosi may reach a deal on stimulus legislation during the lame duck period between the general election and the inauguration of the next president, the markets are not anticipating the disbursement of additional stimulus money until January. Some speculate that if Trump were to lose the election, his administration would have little incentive to promote a large COVID-19 stimulus package through during the lame duck period. In addition, both Trump and Biden are promising significant investments in infrastructure. A large infrastructure bill could help offset the unprecedented economic effects of COVID-19, including the nationwide high unemployment rates, while taking advantage of historically low cost of materials and modest interest rates.
What about trade and China?
Cutler: Trump has not handled trade like a typical Republican in the White House – he has been more activist, more protectionist, and more vocal about America’s trade partners. And China has been a particularly sensitive political issue for Trump on many levels. While the tone on trade may change under a Biden administration, China trade policies are not anticipated to change significantly. Trump has used discretionary presidential authority to impose punitive tariffs designed to protect national security and curtail unfair trade practices. Those tariffs are likely to remain in place for the foreseeable future, even under a Biden administration. On broader trade policy, Biden may want to work with U.S. allies to help contain Chinese trade influence.
Curtin: There will be continuing CFIUS scrutiny around Chinese buyers seeking to acquire U.S. technology and personal data, a policy initiated under President Obama. In a new administration, Biden likely would focus on pursuing improved relations with U.S. allies in Asia, such as Japan, South Korea, India, and Vietnam. There also will be heightened expectations from the business community to revisit the Trans-Pacific Partnership or risk losing further influence in Asia to China.