Trump, M&A, and Merger Arbitrage

In collaboration with Alexander Ellerby, CFA Senior Research Analyst - Hedge Funds, Kepler Absolute Hedge

The incoming Trump administration signals significant shifts in economic policy, poised to invigorate the mergers and acquisitions (M&A) landscape. Deregulation, pro-business tax reforms, and heightened investor confidence are expected to create a favourable environment for corporate consolidation and strategic acquisitions. While trade policy uncertainties and elevated valuations present potential headwinds, the overall outlook suggests a robust M&A resurgence.

Until now, U.S.-focused merger arbitrage managers have faced two primary challenges: heightened antitrust risks and relatively low deal volume—both of which are likely to improve materially in the near term.

A Stronger Outlook for M&A

Global M&A volumes have remained below their long-term trend, despite a lack of significant stress in financial markets. Subdued activity in recent years can be attributed to macroeconomic uncertainty, including the COVID-19 pandemic, inflation, and rapid interest rate hikes.

However, the U.S. economy remains resilient. Solid growth, moderating inflation, and rate cuts are boosting corporate confidence. For investors, these factors point to a multi-year uplift in M&A activity, with opportunities emerging across various sectors.

Deregulation: A Catalyst for Corporate Activity

A cornerstone of Trump’s economic agenda is sweeping deregulation across key industries:

• Energy Sector: Relaxation of environmental regulations and expanded oil and gas drilling programs reduce compliance costs, enhancing profitability and encouraging consolidation among energy firms.
• Financial Services: Reduced capital and liquidity requirements, alongside lighter compliance obligations, make M&A more attractive for banks, asset managers, and fintech companies.
• Emerging Sectors: Lower regulatory barriers in industries like artificial intelligence (AI), cryptocurrency, and space exploration stimulate innovation. Companies in these sectors may pursue acquisitions to expand capabilities and market share, leveraging reduced oversight to accelerate growth.

For merger arbitrageurs, this wave of activity presents a broader diversity of deals across sizes and sectors than in previous years.

Ample Capital Ready for Deployment

A substantial amount of capital is waiting to be deployed:

• Private Markets: Approximately $4 trillion in “dry powder.”
• Corporate Reserves: Around $7.5 trillion in cash held by non-financial public companies.

Improving financing conditions, driven by open capital markets and declining borrowing costs, further facilitate deal-making.

Tax Reforms: Boosting M&A Appeal

Proposed tax reforms under Trump’s administration are likely to enhance M&A activity:

• Corporate Tax Cuts: The continuation—and potential expansion—of the 2017 Tax Cuts and Jobs Act, including a proposed reduction in the corporate tax rate from 21% to 15%, will increase after-tax profits.
• Incentives for Growth: Permanent research and development tax credits, along with incentives for domestic production, encourage businesses to invest in strategic acquisitions.

These fiscal benefits make acquisitions financially attractive, enabling companies to optimise tax positions while pursuing expansion objectives.

A Stabilizing Macroeconomic Backdrop

Macroeconomic uncertainty around growth, inflation, and policy rates is easing:

• Resilient Growth: Particularly in the U.S., economic strength supports corporate confidence.
• Declining Funding Costs: Rate cuts from the Federal Reserve and other central banks are reducing borrowing expenses.
• Moderating Inflation: Easing inflationary pressures improve margins and alleviate cost concerns.

With election uncertainties resolved, companies have fewer reasons to delay strategic decisions. For merger arbitrage investors, this stability enhances deal predictability and lowers the risk of cancellations.

Trade Policy and Valuation Risks

Despite favourable conditions, potential headwinds remain:

• Trade Policy Uncertainty: Protectionist measures, including expanded tariffs on Chinese goods, could disrupt cross-border M&A. Reciprocal tariffs and foreign investment restrictions may limit international opportunities.
• Elevated Valuations: High stock prices, particularly in technology and healthcare, make acquisitions more expensive. Companies may focus on deals with clear strategic value or synergies to justify premium prices.

Merger Arbitrage: A Promising Opportunity

The enhanced M&A environment under Trump’s administration offers significant opportunities for merger arbitrage strategies:

• Reduced Regulatory Hurdles: A more lenient antitrust enforcement framework improves deal certainty and reduces the risk of delays or cancellations.
• Improved Financing Conditions: Lower corporate taxes, increased liquidity, and reduced interest rates make transactions easier to finance.
• Market Optimism: Lower volatility enables arbitrageurs to forecast outcomes more accurately and manage risks effectively.
• Private Equity Influence: Abundant capital in private equity markets drives sponsor-backed deals, which often feature structured timelines and higher completion probabilities.

Key Takeaways for M&A Investors

• Deregulation and Tax Reforms: Policies under Trump’s administration are likely to reduce regulatory burdens and enhance after-tax profitability, making M&A more attractive.
• Capital Availability: With $4 trillion in private equity dry powder and $7.5 trillion in corporate cash reserves, significant capital is ready to be deployed.
• Sector Opportunities: Energy, financial services, and emerging industries like AI and cryptocurrency are expected to drive deal flow.
• Improving Macroeconomics: Resilient growth, declining funding costs, and moderating inflation create a favourable backdrop for deal-making.
• Risks to Watch: Trade policy uncertainty and elevated valuations in certain sectors may challenge cross-border and high-premium deals.

Conclusion

The convergence of deregulation, pro-business tax policies, substantial capital availability, and improving macroeconomic conditions sets the stage for a robust M&A environment. While trade policy uncertainties remain a potential risk, the overall outlook supports a significant multi-year uplift in deal-making.

For merger arbitrage investors, this environment offers an expanded opportunity set with improved deal certainty and profitability. Supportive policies and favourable market conditions make merger arbitrage strategies highly attractive, enabling investors to capitalise on the resurgence of corporate deal-making.