(Angus Mordant/Bloomberg/Getty Images)
Dealmaking is the lifeblood of Wall Street. When companies combine, or one company buys another, it creates opportunities for investors and banks to make money by providing advice or financing for the transaction.
Last week, President Joe Biden signed a package of bills to fund the federal government, narrowly avoiding a very expensive and damaging shutdown. But analysts say that funding cuts in the plan could end up harming mergers and acquisitions on Wall Street – squashing hopes of a recovery in dealmaking.
What's happening: It's been a rough few years for investment bankers. Goldman Sachs reported substantial drops in revenue last year as 2023 saw the lowest M&A activity in a decade.
Dealmaking activity has dried up as exeutives have contended with recession fears, interest rates and geopolitical tensions.
Thankfully, some green shoots of recovery have been emerging.
"While many of these headwinds will continue to impact decisions in 2024, and we can add upcoming elections and supply chain issues to the list, there are reasons to be optimistic for more deal making this year," said Lucille Jones of LSEG Deals Intelligence.
A more stable economic climate, expectations 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," said Jones.
The bad news: Recent regulations and proposed budget cuts threaten to step on those green shoots before they're able to flower.
Late last year, the Federal Trade Commission and Department of Justice announced 11 new guidelines for mergers in the US. These guidelines were the biggest changes to the way US regulators review M&A in 40 years, said Mitch Berlin, a vice chair at EY.
He estimated that those changes could add an additional two to three months to merger timelines.
Now, a new threat has emerged.
The spending package signed into law by Biden provides $233 million to the antitrust division for enforcement, $45 million less than what the Congressional Budget Office estimated the agency would collect in fees this year.
The 20% cut could be substantial, especially given regulators' "ambitious agenda" for oversight, said Berlin.
"Regulatory risk remains a top headwind for 2024 — and it may have just picked up speed," he said. "The House spending bills divert funding for the DOJ's antitrust division, which could lead to even longer deal review timelines, especially on the heels of the new merger guidelines that put more deals under scrutiny."
Berlin told CNN that he expects CEOs to "exercise prudence" with risk taking this year as a result.
The good news: Mergers and acquisitions worth a combined $522 billion were announced globally during the first two months of 2024, according to data from LSEG. That's 75% more than the value recorded during the same period in 2023, which had the slowest annual start for deal making since 2009.
Nine megadeals, worth $10 billion each, were recorded in January and February. That's equal to the all-time record set in 2018. They included huge deals such as Capital One's $35.3 billion offer to take over Discover Financial Services and Hewlett Packard Enterprise's $14 billion bid for Juniper Networks.
And while a budget cut could take some wind out of Wall Street's sails, "CEOs' confidence in the economy is on the upswing and they're hungry for growth through M&A," said Berlin.
Why it matters: Dealmaking isn't just good for Wall Street. It's good for Main Street, too.
"M&A is a powerful tool to generate economic value and transform your business," said Berlin. "It can lead to increased shareholder returns."
But, he warned, adding uncertainty threatens to hinder dealmaking activity. "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."
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