Dealcember and the Trump Bump

December 1, 2024 — “It’s morning in America,” prominent venture capitalist Marc Andreessen proclaimed in his heavily-praised recent appearance on the Joe Rogan Experience podcast.

Andreessen’s excitement and hope for a new dawn of the U.S. economy, along with a prosperous business environment, was catalyzed by Donald Trump’s election victory.

One of the core tenet’s of Andreessen’s diatribe stemmed from the punitive regulatory environment fostered under the Biden administration over the past four years. He railed against the harmful overreach enacted by various government agencies, including the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC). Specifically, he discussed on the podcast how the SEC tried to kill entire industries, while the FTC tried to control large segments of the economy, stifling innovation and crushing capital markets activity. The prominent businessman had previously correctly complained that regulators “are punitively blocking startups from being acquired.”

Concerningly, on the podcast, Andreessen stated that the FTC had been “thoroughly weaponized,” and that the agency “went too far” in terms of exercising its power to control businesses and the economy, culminating in an epiphany after being asked what he did after hearing the government’s plan to fully regulate vast swaths of the economy and implement Chinese-style economic control.

“When you leave a meeting like that what do you?” asked Rogan, responding to Andreessen’s distress after leaving a meeting with a U.S. government agency.

The former card-carrying Democrat succinctly replied, “You go endorse Donald Trump.”

It was not just well-to-do venture capitalists criticizing the regulators for unjust overreach. In a recent court case, a U.S. federal judge chastised the SEC, stating that the agency had engaged in a “gross abuse of the power entrusted to it by Congress” in its dispute with a blockchain technology firm.

Now that an administration with a clear mandate for deregulation will come to power, capitalists such as Andreessen are optimistic about the return of economic prosperity and positive capital markets activity.

Merger arbitrageurs may directly benefit from the upcoming unshackling of the regulatory environment due to the mitigation of government agency overreach.

The SPAC market was booming before President Biden appointed Gary Gensler as Chair of the SEC in April of 2021. Once in power, one of Gensler’s first mandates was to kill the SPAC asset class via suffocating regulation. He was nearly successful, as blank check issuance and merger activity has fallen off a cliff. Since 2021, SPAC issuance is down -95% to levels not seen since 2016.

Source: Accelerate

The SPAC market has shrunk -93%, from $212 billion to $14 billion, since Gensler was sworn into office. To give a sense of the regulatory squeeze put on the market, before the crackdown, a SPAC merger took approximately 4 months to close, with most deals being consummated successfully. SPAC mergers this year have taken more than 11 months to close, nearly three-times as long, with nearly 50% of blank check companies failing to merge and forced to liquidate.

During the boom, many great public companies resulted from SPAC mergers, including Mirion Technologies, Archaea Energy, Rocket Lab, Blue Owl, GCM Grosvenor, Ermenegildo Zegna, and more.

It was not just the SEC that implemented a harsh regulatory environment that punished companies and investors. For example, in January, the Department of Justice (DOJ) successfully blocked JetBlue Airways’ acquisition of Spirit Airlines, despite the companies having a 9% proforma market share, compared to 13% for the fourth-largest airline and 23% for the largest carrier. Just 10 months later, Spirit filed for bankruptcy. Instead of shareholders receiving $30.00 per share and customers continuing to enjoy Spirit’s offering, shareholders will now get zero and Spirit’s service is in jeopardy. The consumer welfare standard, in which mergers are evaluated to determine whether they harm consumers in any relevant market, apparently went out the window to advance the Biden administration’s anti-merger stance.

In addition to the SEC and DOJ, another agency, the FTC, fostered a harsh environment for companies and investors. For example, last month, the FTC successfully blocked Tapestry’s $8.5 billion acquisition of fashion house Capri Holdings, despite the proforma company holding just a 5% market share of the global luxury goods market, well behind its giant European competitors including Chanel (with 7% market share), Kering (7%), and LVMH (19%). Nevertheless, the FTC convinced an inexperienced left-leaning judge, appointed by Joe Biden, that the companies would create a monopoly in the nebulous “accessible luxury market”. For reference, the deal was cleared by all other major global antitrust regulators, including China, who logically stated that the business would have a proforma market share of below 10%.

That said, while the Trump administration is expected to be far friendlier to businesses and the capital markets, it will be no panacea. Trump campaigned against Nippon Steel’s acquisition of U.S. Steel, indicating numerous times that he would block the Japanese company’s acquisition of the storied but struggling American steel firm for political purposes, under the guise of national security, which is controlled by the Committee on Foreign Investment in the United States (CFIUS). The steel merger is still in limbo, and could seemingly go either way. In addition, during his last administration, Trump got the DOJ to sue to block AT&T’s acquisition of Time Warner, solely because he disliked Time Warner’s CNN subsidiary. The companies won in court several months later and successfully closed the transaction.

Nevertheless, post Trump’s victory, the merger market is showing signs of green shoots. This “Trump bump” saw an increase in M&A activity in November, including two deals that likely would not have seen the light of day under a Biden or Harris administration.

During the month, eleven M&A deals were announced in the U.S., representing an aggregate $58 billion of transaction value. Nearly all came after the November 5th election. In addition, three deals were announced in Canada last month, worth a total of $12.6 billion.

Of the U.S. mergers struck, Quikrete’s proposed acquisition of Summit Materials and Amcor’s announced merger with Berry Global are notable in that the merging companies operate in the same industry. These two deals are unlikely to have been signed had Harris won the election. While the proposed transactions appear complementary and not anti-competitive, the current administration takes a dim view of the merger of companies operating within the same industry. Regulatory measures could result in deal delays at best, and deal termination due to government scrutiny at worst. Both regulatory actions are negative for merger arbitrageurs, as deal delays cause yields (annualized returns) to compress (or even go negative after accounting for funding costs), while deal terminations almost always result in the loss of capital.

Former U.S. president Ronald Reagan’s political ad, “It’s Morning in America Again,” is widely touted as one of history’s most successful presidential campaigns. The statement encapsulated the themes of optimism, national renewal, and prosperity, which were central to Reagan’s re-election campaign. Last week, Marc Andreessen repeated the sentiment, supporting his faith in the upcoming Trump administration’s pledge to unleash economic prosperity and business success through deregulation and reduced government agency overreach. These sentiments are shared by capital markets participants and merger arbitrageurs alike, with the hope for brighter future opportunities come 2025. Green shoots have already emerged, and may evolve into a full-on great capital markets environment for all who participate.

While it is still early days of the optimistic new dawn, hopefully, a “Dealcember” confirms the trend.

The AlphaRank.com Merger Monitor below represents Accelerate’s proprietary analytics database on all announced liquid U.S. mergers. The AlphaRank Merger Arbitrage Effective Yield represents the average annualized returns of all outstanding merger arbitrage spreads and is typically viewed as an alternative to fixed income yield.

Each individual merger is assigned a risk rating:

• AA — a merger arbitrage rated ‘AA’ has the highest rating assigned by AlphaRank. The merger has the highest probability of closing.
• A — a merger arbitrage rated ‘A’ differs from the highest-rated mergers only by a small degree. The merger has a very high probability of closing.
• BBB — a merger arbitrage rated ‘BBB’ is of investment grade and has a high probability of closing.
• BB — a merger arbitrage rated ‘BB’ is somewhat speculative in nature and has a greater than 90% probability of closing.
• B — a merger arbitrage rated ‘B’ is speculative in nature and has a greater than 85% probability of closing.
• CCC — a merger arbitrage rated ‘CCC’ is very speculative in nature. The merger is subject to certain conditions that may not be satisfied.
• NR — a merger-rated NR is trading either at a premium to the implied consideration or a discount to the unaffected price.

The AlphaRank merger analytics database is utilized in running the Accelerate Arbitrage Fund (TSX: ARB), which may have positions in some of the securities mentioned.

* AlphaRank is exclusively produced by Accelerate Financial Technologies Inc. (“Accelerate”). Visit Alpharank.com for more information. Disclaimer: This research does not constitute investment, legal or tax advice. Data provided in this research should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this research is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Accelerate may have positions in securities mentioned. Past performance is not indicative of future results.