Policymakers believe a divided U.S. government favors mergers and acquisitions

Authors: Joshua Franklin, Pamela Barbaglia and Krystal Hu

NEW YORK/LONDON (Reuters) – Joe Biden’s projected victory in the U.S. presidential election and the Republican Party’s potential to retain control of the U.S. Senate could spark a surge in mergers and acquisitions (M&A), which has been a huge success amid the Covid-19 pandemic, policymakers he said.

Bankers and lawyers advising companies on mergers and acquisitions said the outcome, if confirmed, would be the best possible in terms of providing a stable economic and regulatory environment needed for deals. They expect Biden, the Democratic Party’s nominee, to be more predictable in governing than Republican President Donald Trump, and that the Republican-controlled U.S. Senate will rein in Biden’s most interventionist policies.

“This dynamic can be good for deals because it provides stability,” said Peter Orszag, who served in the White House under President Barack Obama and now heads the financial advisory arm of investment bank Lazard Ltd. .

“The only caveat is that the chances of another large round of stimulus that would improve the macroeconomic outlook are lower than if Democrats took the Senate,” Orszag added.

All major U.S. television networks predicted Biden would win the presidency on Saturday, although Trump said he would continue to challenge the result in the courts. Two runoff U.S. Senate races in Georgia that will determine which party takes control of the upper house of Congress will be held on Jan. 5, and based on this week’s results, Republicans will be favored to retain control.

Republicans with a slim majority in the Senate could block much of Biden’s legislative and spending agenda, as well as key nominations to his Cabinet and government agencies.

“Corporate leaders and markets like stability. “Gridlock in its own way can be seen as a stabilizer, as we saw during the Obama administration,” said Cary Kochman, co-head of global mergers and acquisitions at Citigroup Inc. .

While M&A deal activity rose in the third quarter as executives rushed to revisit deals that were put on hold at the height of the coronavirus outbreak, global deal volume fell 12% year-over-year to 2, according to data provider Refinitiv .84 trillion dollars. The volume of transactions involving acquired U.S. companies fell 32% year to date to $1.07 trillion.

Policymakers said certainty about financial and regulatory policy will be key in the coming months to continue mergers and acquisitions as a new wave of coronavirus infections spreads across the United States and much of the world.

“I would venture to say that the Trump administration has paused some mergers and acquisitions because Trump could be unpredictable at times with his Twitter account,” said Bill Curtin, global head of mergers and acquisitions at Hogan Lovells.

If Democrats took control of Congress, policymakers said the most destructive aspect of Biden’s agenda would be tax increases. Biden has proposed raising the capital gains tax rate from 20% to 39.6% for people earning more than $1 million. This would make it more expensive for corporate owners to cash out their shares.

“The deals won’t be as heavily tax-driven because Biden isn’t expected to be able to immediately make massive reforms to the U.S. corporate tax system or health care systems,” said Patrick Sarch, a partner at the law firm White & Case LLP.

BARRIERS TO CHINESE TAKEOVERS REMAIN

Scrutiny of Chinese takeovers of U.S. companies, which has intensified under Trump, is expected to continue, policymakers say. Over the past four years, the United States has blocked many Chinese acquisitions, especially of American technology companies, on national security grounds and even ordered some Chinese companies, such as the owners of social media apps TikTok and Grindr, to divest them.

Deep U.S. suspicions about China’s economic power, technological advances and accounting standards are likely to keep many obstacles to cross-border investment in place under Biden, policymakers say.

“The nationalistic focus and high degree of scrutiny of sensitive transactions that have emerged in recent years are not going away any time soon,” said Nestor Paz-Galindo, global co-head of M&A at UBS Group AG .

Policymakers said one business sector that could be a major beneficiary of the election outcome is the oil and gas industry. Low energy prices have triggered a wave of consolidation in the oil space in recent weeks, and it could continue unimpeded as Republicans scale back Biden’s clean energy agenda.

“We will see some increase in valuations in the energy sector. The market will get the impression that a Republican Senate will hold Biden back from regulating the U.S. energy sector as much as he could,” said Vito Sperduto, co-head of global mergers and acquisitions at Royal Bank of Canada .

(Reporting by Joshua Franklin and Krystal Hu in New York and Pamela Barbaglia in London; Editing by Greg Roumeliotis and Jonathan Oatis)