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Election uncertainty could hamper rush to finish 2020 deals

Michael Hytha, Nabila Ahmed and Katie Roof

The pandemic turned out to be a short-lived blow to mergers and acquisitions. Dealmaking rebounded sharply in the last three months as companies revived deals that had been on hold.

Now, Wall Street is worried about the rest of the year. It’s typically a strong period as companies race to complete mergers before year’s end. But 2020, of course, is far from typical.

“The concern is that we’re not going to know who is president on election day, and maybe for a while longer,” said Marc-Anthony Hourihan, co-head of global M&A at UBS Group AG. “Regardless of who wins politically, we don’t want it to be similar to how it was in the early days of the global pandemic where there were days the market was off 1,000 points.”

Pedestrians pass the New York Stock Exchange, Friday, Oct. 2, 2020, in New York.

The election outcome already ranked as a big unknown for dealmaking in the fourth quarter. With President Donald Trump hospitalized after contracting the coronavirus, the unpredictability of the coming months has reached a new threshold.

The year started robustly for deals before Covid-19 took hold. Once it did, the Federal Reserve stepped in, slashing its benchmark interest rate to virtually zero. That helped get dealmakers active again. In the summer, companies started revisiting deals they had put on ice in the spring.

Chips, Blank Checks

All told, the value of pending and completed deals announced since July 1 rocketed back to $463 billion, up from $86 billion in the second quarter, the data show.

The nine deals topping $10 billion in the quarter included the biggest-ever semiconductor deal, Nvidia Corp.’s $40 billion cash and stock acquisition of Arm Ltd. from SoftBank Group Corp. Biotechnology and SPAC deals were also robust, with Gilead Sciences Inc.’s $21 billion purchase of Immunomedics Inc. and the largest blank-check transaction on record, Gores Holdings IV Inc.’s $16 billion cash and stock deal for United Wholesale Mortgage.

Taxes & More

Presidential contests are typically anxiety-inducing events for the markets in general and no less so for dealmakers focused on potential shifts in antitrust and other regulatory concerns, as well as the consequences of broader tax and economic policies.

If former Vice President Joe Biden defeats Trump – and especially if Democrats take control of Congress – an overhaul of capital gains taxes could hit those looking to sell businesses, motivating some to push for transactions sooner rather than wait.

Atif Azher, an M&A partner at Simpson Thacher in Palo Alto, California, said he’s noticed that the election is playing a part in deal activity and there’s a rush to complete deals by year-end.

“There’s some uncertainty about what the landscape will look like next year,” Azher said.

Obama, Bush

Deal volume in the fourth quarter has typically exceeded the previous quarter’s. That was true for three of the five U.S. presidential election years this century.

The last exception was 2008, when the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. accelerated the financial crisis that spurred the Great Recession, depressing deal activity.

The other exception was 2000. That quarter was marked by election turmoil, with the outcome undecided until Dec. 12, when the Supreme Court effectively made George W. Bush the winner by ruling against the further recounting of Florida ballots.

All that aside, one thing dealmakers don’t have to worry about this year is a hike in interest rates, said Kate Barton, Ernst & Young LLP’s global vice chair for tax.

“Some of the M&A we have seen in recent years is a function of low interest rates,” she said. “The fundamentals of dealmaking are still right whoever is in power.”