US M&A: The New Normal
Hindsight is a wonderful thing, but let’s be honest, whilst each of us grouses their rendering of the post-election analysis around the Zoom calls, deep down most of us knew that it was going to end up this way.
This same hindsight should hopefully finally be the overdue nail in the coffin – and a warning for the trading desks in gambling operators – of so-called “quantitative polls”, in layman’s terms – models attempting to predict future outcomes solely on historical and empirical data. Because by this point – after three recent epic fails (referendum of 2016 and stateside elections of 2016 and 2020) – there is finally a growing acknowledgement of the flaw in failing to spot the ever-increasing tranche of ‘shy voters’ who say one thing to the pollster but vote the other way.
The signals all started with the odds traders when their spreads began to oscillate widely a few weeks ago. Add that to an impenetrable, quasi-religious faith in the status quo, and maybe we should have trusted our instincts when odds were 26/5 and better.
Irrespective of how the legal debacles over the next few weeks will play out, what happens over the next term will be markedly different to the last four years. And the gaming, and mergers and acquisitions landscape will also be rewritten as a result.
The short-term impact will be minimal, as it is fairly straightforward, and familiar. At some point US equities will rebound, likely to new highs, reinforcing faith in prevailing market conditions and proceeding under an assured belief that this new climate is stable, well-treaded and well-known. However, beyond the next few months – around a year from now – a new dynamic will emerge.
Recall that for most of the previous administration’s tenure, the policies enacted were framed with an end-goal to secure a second term in office. Broadly speaking these were protectionist, inward-looking, and mostly sensationalist. That tactic had clearly resonated with the home crowd, which according to a more esoteric exit poll, had a resounding 81% of voters preferring to vote for someone with “strength” as opposed to “doing the right thing”. Now that objective has been reached, an even more libertarian attitude will start to emerge, even as the new administration seeks to undo some of the retrenchment of the old guard.
Several leading political think-tanks have signalled that, irrespective of the local and foreign policies, the next four years would see, amongst other things, America distance itself further from international trade regulations and cross-border legislation.
This would mean higher tariffs on EU and Asian products and services. Foreign takeovers of US assets would be discouraged and even interfered with, and the acquisition of the next TikTok would be closely monitored and possibly blocked unless it got administrative approval. Let’s also not forget it’s only reciprocally likely that other countries will enact protection mechanisms to discourage unilateral and imbalanced mergers or acquisitions.
So, whilst Wall Street gets ever more creative with SPACs, the degree of freedom with which they can be exerted outside the States will become restricted. In so doing, the ability for funds to increase their capitalisation and underlying asset value will also become limited, crippling future value (read pension funds and wealth savings).
Gaming is another case in point. California and New York are going to be key states when it comes to new regulation, and given the variables in play – we need to hope they can still proceed without any Senate hindrance. We should also keep a close eye on gaming legislative developments in Ohio, Maryland and Oklahoma, as that it’s not the longer-term strategy that will impact here, but more the protracted bureaucratic limbo that risks taking place during this administrative transition. Looking at Morgan’s Stanley’s recent devaluations in the sector, also factoring in the looming possibility of losing sports revenues – there’s currently a fog of political and economic uncertainty that will need to be navigated pragmatically, and gradually.
All doom and gloom? Well, not quite. For almost half a century now, significant wealth management in the United States has been conducted outside of the US. Which brings us back to the weapon of choice for the discretionary venture capitalist – the Special Purpose Vehicle, or SPV. Irrespective of US macroeconomic situation and foreign trade policies, a myriad of SPVs have been happily structured away from US shores, in more amendable Caribbean jurisdictions. Structures such as these allow a relatively unhinged (and unaudited) degree of freedom for buyers with deep pockets to conduct their businesses away from more restrictive domains.
There is a catch, however. To continue flying under the radar, such vehicles won’t be able to freely acquire the majority of publicly traded entities. This will affect how and what UK and EU entities are acquired over the coming years. Whilst the William Hills of this industry will still be of appeal to larger gambling buyers and capital management players, the medium-cap, privately held European firms will be exposed to a new tranche of ‘creative’ buying mechanisms from across the pond that should pass muster with much less friction.
However, for all that to happen, America needs to sort out the legal mess it will find itself in over the coming months. Otherwise, uncertainty on the direction of the next administration will rapidly erode dollar strength. As we experienced over the last 18 months on this side of the Atlantic due in part to cheaper currencies, the direction of buying may well also flip its head, and find stronger European ventures looking to buy up ever more (and ever cheaper, under a weak dollar) data and platform assets across the pond.