Perspectives – Marc Cooper – September 2022
Politics and the M&A Market
by CEO Marc S. Cooper
As another election cycle plays out this autumn, investors and financial professionals are naturally assessing how the U.S. midterm congressional races might influence future fiscal and regulatory policy decisions. When it comes to mergers and acquisitions, one issue towers above the rest: the availability of capital.
M&A is fueled by capital, whether it’s from the private equity world, debt markets, or the cash flow and currency of publicly listed companies. When capital is scarce, deal flow dries up, and such was the case during the early phases of the 2008-2009 financial crisis. But now, things look a little different – balance sheets and cash flows of most U.S. firms are quite strong and the fundamentals for M&A remain largely in place. While we often look to the micro factors and how they impact the M&A market, we must also consider the macro factors that play a material role in capital supply and activity.
While interest rates are rising globally as central bankers tighten monetary policy to offset inflationary pressures, it’s important to place the recent moves in historical perspective. Federal Reserve Board policymakers have signaled that they expect their benchmark interest rate to end 2022 in the 3.25% to 3.5% range, and closer to 4% in 2023. I’ve been around long enough to remember when the Fed jacked up its key rate to about 20% in the early 1980s to combat inflation. So, yes, the cost of capital is rising, but it’s nothing the economy hasn’t weathered before.
Capital inflows in the U.S. continue to be strong, as global investors look for a safe harbor in an uncertain economic and geopolitical environment. That’s one reason why the greenback in 2022 has outperformed the currencies of nearly all of the Group of Ten economies.
But don’t get me wrong: the U.S. has plenty of problems that need to be addressed. As a major importer of capital, it’s crucial that our economy remains an attractive destination for global investors. If we lose that status, the fallout for our corporate and government finances would be devastating.
To make sure that day never arrives, it’s important that our political class be thoughtful about government debt levels and fiscal spending. Arbitrary or overly-stringent regulations and antitrust policy can undermine the ability to plan and complete deals that can enhance American corporate competitiveness. We need a regulatory environment and tax policy that doesn’t choke off business, entrepreneurship and innovation.
On top of that, we need the kind of thoughtful immigration policies that keep the labor supply healthy and attract the best and brightest from all corners of the globe.
Further out, it’s crucial that Washington cultivates the country’s economic competitiveness. The dollar has remained the world’s principal reserve currency since the end of World II, conferring huge benefits to American companies and the government. Our leadership in the strategic industries of tomorrow, as well as the financial flexibility to acquire or sell corporate assets worldwide, shouldn’t be taken for granted in the long run. We will need smart policies to maintain our edge.
So, what could go wrong? Well, there’s always the possibility of some sort of “black swan” economic shock that changes investors’ perception of the American economy. For the most part, though, our economic destiny is really in our hands. Right now, we are viewed as a first among equals among most global investors.
If that’s going to continue, our politicians and business leaders need to nurture U.S. business competitiveness in the decades ahead. In that sense, America’s biggest adversary may ultimately be America itself.