Since the election results came in, markets have zoomed higher, and many in the financial media seem to have an endless list of sectors and stocks that are headed for better days. I agree with some, but not all of them. The exuberance and assumptions about the impact of future policies are driving much momentum. 

But one area where there’s a solid case for optimism is in mergers and acquisitions (M&A). M&A activity has fallen sharply from its 2021 peak, to the lowest number in 10 years. Regulatory shifts and financial incentives could drive a resurgence in activity back to 2018/2019 levels.

As an example, earlier this year, Qualcomm Inc. announced its interest in acquiring Intel, only to put the deal on hold until after the election. This is just one instance of the many companies that chose to wait for potential regulatory shifts. And now, with a Trump administration, the regulatory process is expected to be less stringent. A lot will depend on who Trump appoints to replace the current FTC Chair, Lina Khan, who has taken a strong stance on enforcing antitrust laws and scrutinizing deals that could create monopolies. Many in the industry believe hurdles will be easier to clear. 

What financial factors are fueling M&A potential?

• The healthy financial position of major companies and private equity (PE) funds. Together, top companies in the S&P 500 and private equity market have trillions of dollars in cash and cash reserves (sometimes called “dry powder”) ready to be deployed. The large amount of dry powder, in particular, adds pressure on private equity firms to deliver returns to their investors, creating a strong demand for acquisitions.

• Interest rates also play a critical role in M&A, especially for the deals that rely on debt financing, which accounts for the majority. The Fed cut rates by 0.25% last week, and the market is pricing in 1% of cuts next year. A resurgence of inflation could limit those cuts. However, competition between syndicated lenders (loans originated by financial institutions such as banks) and direct lenders (loans spearheaded by asset managers and investors) is also driving down borrowing costs. As seen in the chart below, leveraged loan yields—a proxy for these debt-fueled deals—have been declining, even before the latest Fed cut.

So what areas could be poised to see M&A Growth?

• Technology: The tech sector faced intense scrutiny under Biden-Harris, but Trump is expected to take a lighter approach to antitrust policies, which could open the door for more deals.

• Banking: Given slow loan growth, profitability pressures, and stiff competition from the giant banks, regional banks may see large scale acquisitions. 

• Energy: The midstream infrastructure space—which includes pipeline and storage networks—could see consolidation, benefiting from a more favorable regulatory environment.

• Healthcare: Looser antitrust policies might encourage drugmakers to pursue big mergers similar to those seen during Trump’s first term, such as Bristol Myers’s $74 billion acquisition of Celgene. We could also see major health insurance deals resurface, with insurers like Cigna and Humana reportedly back in informal talks. Trump’s previous term saw major transactions like Cigna’s purchase of Express Scripts and CVS’s acquisition of Aetna.

And I might add one more: the consumer sector, as I discussed here, could be a place that not only sees investment but also a place for lower valued acquisitions. Certainly an exciting aspect to watch for over the next couple of years.