The Impact of Regulatory Changes and Budget Cuts on Wall Street’s Mergers and Acquisitions Landscape
The world of mergers and acquisitions (M&A) is a vital aspect of the financial industry, providing opportunities for investors and banks to earn income through deal advisory or financing services. Last week, President Joe Biden signed a bill to fund the federal government, thereby averting a costly shutdown. However, some analysts suggest that this legislation may hinder M&A activity and potentially delay the recovery of dealmaking on Wall Street.
The recent years have been challenging for investment bankers, with substantial drops in revenue reported by firms like Goldman Sachs in 2023. The M&A market has seen a decline as executives face recession fears, high interest rates, and geopolitical tensions. Nevertheless, promising signs of recovery have emerged.
Lucille Jones of LSEG Deals Intelligence stated that although several challenges, including economic instability, upcoming elections, and supply chain issues, will persist in 2024, there are reasons for optimism regarding more deal-making this year. A more stable economic climate, anticipation of interest rate cuts by the Federal Reserve, pent-up buyer demand, and a red-hot US stock market have made it easier for dealmakers to price, execute, and plan their deals.
However, recent regulatory changes and proposed budget cuts pose a significant threat to the recovery of M&A activity. Late last year, the Federal Trade Commission (FTC) and Department of Justice announced new merger guidelines in the US – the most significant changes since 1982. These guidelines could add an additional two to three months to M&A timelines, according to Mitch Berlin, a vice chair at EY.
Now, another challenge has emerged: The spending package signed by Biden provides $233 million to the antitrust division for enforcement – a 20% cut compared to what the Congressional Budget Office had estimated the agency would collect in fees this year. This reduction could have substantial consequences, as regulators’ ambitious oversight agenda may lead to even longer deal review timelines following the new merger guidelines.
Berlin expects CEOs to exercise caution with risk-taking this year due to regulatory uncertainty: “Regulatory risk remains a top headwind for 2024, and it may have just picked up speed. The House spending bills divert funding for the DOJ’s antitrust division, which could lead to even longer deal review timelines.”
Despite these challenges, M&A activity has shown signs of recovery, with deals worth a combined $522 billion announced globally during the first two months of 2024 – a 75% increase compared to the same period in 2023, which had the slowest annual start for deal making since 2009. Nine megadeals, worth $10 billion each, were recorded during January and February, including Capital One’s offer to take over Discover Financial Services and Hewlett Packard Enterprise’s bid for Juniper Networks.
CEOs’ confidence in the economy is on the upswing, and they are eager for growth through M&A. However, adding uncertainty threatens to hinder dealmaking activity: “M&A is a powerful tool to generate economic value and transform your business. It can lead to increased shareholder returns. But, if companies find it harder to transact to transform, we risk seeing a slowdown in economic activity and innovation and missed opportunities in the marketplace.”
