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Change in leadership of the Federal Trade Commission could spark M&A in tech, healthcare and beyond

Donald Trump’s victory could prove to be just what the doctor ordered for dealmakers. That is particularly the case in sectors where consolidation has been most held back, including tech and healthcare. But much remains to be seen—especially considering some of the populist forces that helped propel the 45th President to another term.

Wall Street’s dealmakers are already sharpening their pencils. Investment banking titans Goldman Sachs, Morgan Stanley and JPMorgan Chase saw their stocks notch their biggest single-day gains in four years the day after the election. Megacap tech companies have also rallied—adding $773 billion to their collective market cap this week—while biotech stocks have jumped. One big reason for the optimism is the belief that the incoming administration will prove much more friendly to major mergers and acquisition transactions that have been increasingly off the table for these industries over the past four years.

Few figures in the Biden administration have clashed more with American corporations than Lina Khan, the 35-year-old chair of the Federal Trade Commission. Khan has been a vocal opponent of tech giants, challenging companies like Microsoft MSFT -0.68%decrease; red down pointing triangle, Google, Amazon AMZN -0.89%decrease; red down pointing triangle and Meta Platforms META -0.40%decrease; red down pointing triangle. The exit of Khan and her Justice Department counterpart, Jonathan Kanter, would signal a shift to a more relaxed antitrust stance.

While antitrust policy isn’t the only factor influencing M&A, loosening restrictions could unleash pent-up demand. The market could use the boost. Last year saw the lowest number of M&A deals targeting U.S. companies since 2015, and this year is on pace to close with an even smaller number of transactions announced, according to data from Dealogic.

Megadeals have faced a particularly high barrier—especially those by companies that regulators in the U.S. and Europe have deemed “Too Big to Deal.” Enhanced scrutiny has significantly increased the time required to close deals of this scale. It took Microsoft nearly two years to complete its $75 billion acquisition of Activision Blizzard that wrapped last year, compared with the six months required to close its next largest deal—the takeover of LinkedIn in 2016.

Such lengthy waits act as another barrier to dealmaking. Amazon gave up on buying roomba-maker iRobot IRBT 0.80%increase; green up pointing triangle earlier this year after 17 months; it took the e-commerce giant less than three months to clear its acquisition of Whole Foods in 2017—at nearly eight times the price. Adobe ADBE -1.25%decrease; red down pointing triangle likewise walked away from an effort to buy design software maker Figma late last year after 15 months. By contrast, the average time to close major U.S. tech deals from 2018 through 2020 was a little under six months, according to Dealogic.

In healthcare, a shift in antitrust policy could enable pharmaceutical companies to pursue larger biotech acquisitions or even consider megamergers between pharma giants of the kind that were once common in the industry. In recent years, smaller deals of $5 billion or less have become much more popular in healthcare, while big or even midsize acquisitions have become less frequent. Notable exceptions were Pfizer’s PFE -1.18%decrease; red down pointing triangle $43 billion buyout of Seagen and Amgen’s $27.8 billion acquisition of Horizon Therapeutics, though the FTC tried to stop the latter and might have looked more favorably on the former due to Pfizer’s positive role during the pandemic. Megadeals like Bristol Myers’ BMY -1.04%decrease; red down pointing triangle acquisition of Celgene for $74 billion in 2019 or Pfizer’s $68 billion acquisition of rival Wyeth in 2009 have been out of the question.

Health insurers might also see new opportunities. For instance, some on Wall Street expect that talks for a Humana HUM 0.13%increase; green up pointing triangle-Cigna blockbuster deal—which The Wall Street Journal reported took place last year—could be revived. Humana stock is up over 10% since Trump’s victory, also due partly to expectations of a more favorable Medicare Advantage policy.

In recent years, many in Silicon Valley and in the biotechnology industry have voiced concerns that the Biden administration’s tough antitrust stance was eroding investor confidence in their ability to realize returns on investments. Critics argue that for venture capitalists to continue funding new ventures, they need the assurance that they can eventually reward shareholders through exits, often in the form of mergers or acquisitions.

Khan and her defenders argued that they weren’t out to stop all deals, simply the ones that led to a higher concentration of market power that would eventually harm consumers. That created a bias among industry titans against large deals that could be susceptible to regulatory attention.

“Obviously, anyone who wants to speculate about these things would have to immediately consider the global regulatory environment,” Disney DIS 0.09%increase; green up pointing triangle Chief Executive Bob Iger said on an earnings call last year, when asked about the oft-circulated rumor that Apple AAPL -0.12%decrease; red down pointing triangle might seek to buy the entertainment giant.

One important cautionary note: There is no guarantee that Trump will totally dial back antitrust scrutiny. Vice President-elect JD Vance is among a group of populist Republicans who have taken a more skeptical view of corporate power. Some have referred to them as Khanservatives, a nod to Lina Khan’s populism. Another: There is no assurance that key regulators abroad, who have to approve many large-scale mergers that affect their markets, would follow a Trump administration’s lead, especially if trade relations get more contentious.

Dealmaking depends on much more than just antitrust policy. Interest rates and the availability—and valuation—of suitable targets matter just as much. But dealmakers over the past four years have also had to factor in the growing odds that the federal government will just say no. Now they at least have a chance to reset those odds.

Despite president-elect’s promises, production is unlikely to surge as Wall Street demands returns over growth

US oil executives are eagerly awaiting Donald Trump’s expected rollback of environmental regulations, but despite the president’s pledge to “drill, baby, drill”, production is unlikely to increase significantly during his second term in office. 

Trump made energy policy a pillar of his campaign, vowing to slash red tape and unshackle US oil producers to drive up production and bring down prices for consumers.

“We have more liquid gold than any country in the world — more than Saudi Arabia,” Trump said as he claimed victory early on Wednesday morning. 

The former president’s re-election is a boon for the industry, which had a tumultuous relationship with Joe Biden’s administration. It is also a big pay-off for the corporate leaders who poured money into his campaign war chest. 

“I couldn’t be more thrilled by president-elect Donald Trump’s victory,” said Continental Resources founder Harold Hamm, a Trump donor. “This is a monumental win for American energy and the future of our nation’s security.”

Jeff Miller, chief executive of Halliburton, one of the country’s biggest oilfield service companies, echoed those sentiments. “It could only be positive. In fact, I’m quite optimistic,” he said. 

On taking office next January, the industry expects Trump to slash many of the environmental rules imposed by Biden. Mike Sommers, head of the American Petroleum Institute, said there had been a “regulatory onslaught” during the past four years that would now be reversed. 

“Just the signal from the administration that they want a robust oil and gas industry in the US is going to be a major component to getting this industry the investment that it needs to continue to grow,” he said. 

Among the changes the industry expects are the abolition of rules on tailpipe emissions designed to push motorists towards electric vehicles, as well as expanded access to hydrocarbons through increased leasing in the Gulf of Mexico and on public lands, and the dilution of protections for endangered species. Trump is also predicted to end a pause on new licences for liquefied natural gas terminals.

Trump has vowed to slash corporate tax and unpick Biden’s signature climate legislation, the Inflation Reduction Act. But many in the industry benefit from the IRA and are lobbying against its wholesale removal.

Trump has already begun to shape the team that will be responsible for making these changes. North Dakota governor Doug Burgum is in contention for a new “energy tsar” role that will co-ordinate the deregulatory drive across a patchwork of government agencies.

But despite the anticipated regulatory overhaul, analysts warned that a rapid increase in output during Trump’s second term was unlikely. Production has hit record levels during Biden’s term in office, reaching a fresh high of 13.4mn barrels a day in August despite the regulations. 

But investors — burnt after years of debt fuelled drilling binges — are keen for companies to prioritise returns over growth. The model of capital discipline they have imposed on the sector is unlikely to change. 

“Price and Wall Street are the regulators of US production, not the president,” said Jim Burkhard, head of research for oil markets at consultancy S&P Global. 

Production is set to average about 13.2mn barrels a day this year, according to S&P, rising to 13.6mn b/d in 2025 before probably slipping the following year, driven by lower prices. Trump’s re-election does not change its near term outlook.

Macroeconomic factors, however, may help Trump keep his promise to bring down prices at the pump: sluggish Chinese demand coupled with Opec+ plans to increase supplies are likely to depress prices in the months ahead. But that would have a negative impact on oil producers.

“The market is oversupplied because the Chinese economy is not delivering the kind of demand that it has in the past,” said Daniel Yergin, a Pulitzer Prize-winning energy historian and author of The New Map. “That is the biggest overhang for the global and US oil industry.”

Bob McNally, president of consultancy Rapidan Energy and a former energy adviser to the George W Bush administration, said that while “any president has very limited tools to impact the price of oil in the short term” if strong global supply growth outpaces demand in the coming years, Trump “may get lucky and witness a sharp decline in oil prices”.

“However, he would relearn a lesson from 2020, which is that low oil prices may please consumers, but they also hurt the US shale oil sector,” he said. “In fact the biggest threat to the US shale sector is sharply lower oil prices.”

Trump showed during his first term he was willing to play an active role in shaping the oil price. In 2018, he browbeat Opec into increasing production to bring down prices at the pump, before convincing them to slash it in 2020 to save the US shale patch from bankruptcy as prices plunged in the wake of the coronavirus pandemic. 

Trump has also vowed to exert maximum pressure on Iran, ramping up sanctions on its oil exports, which could push up the global oil price.

One of the most fundamental changes sought by the industry is for Trump, aided by Republican control of the Senate and potentially the House of Representatives, to push through far reaching permitting reform legislation after years of failed attempts. 

Alan Armstrong, head of pipeline giant Williams said he was “very hopeful with more Republican control that the permitting issue finally gets dealt with in a durable and meaningful way”.

Despite Trump’s plans to tear up environmental rules, analysts expect large public oil companies to remain motivated to curb emissions — especially when it comes to methane, a potent greenhouse gas.

“I think the expectation that they will be reducing emissions and investing in clean energy does not go away because Donald Trump was elected,” said Paul Bledsoe, a former climate adviser to the Bill Clinton administration.

“I think that’s a public expectation. That’s an investor expectation.”

Rival groups of bondholders are vying to extend loans to the troubled UK utility

In spring this year, Elliott Management, the $70bn US hedge fund known for circling distressed assets, alighted on a new target: Britain’s largest water company.

After scooping up hundreds of millions of pounds of Thames Water’s debt from panicked asset managers willing to sell at a discount, Paul Singer’s Elliott is now one of several hedge funds engaged in a tussle over the future of the troubled utility.  

Elliott, which earned notoriety for seizing a Argentine naval ship during a 15-year skirmish with the Latin American nation over its defaulted debt, is in the vanguard of a group of Thames Water’s top-ranking bondholders that has agreed to provide a loan of as much as £3bn to the cash-strapped utility, which has warned that without urgent intervention it could run out of money around Christmas.

The emergency loan will not come cheap. On top of a near 10 per cent annual interest rate, the lenders will also pocket substantial fees and stand to gain a further windfall if Thames Water repays the loan ahead of its 2.5-year maturity.

While Thames Water has already signed a so-called lock-up agreement with these bondholders and is trying to gain approval for the deal from the rest of its lenders, a rival group of investors holding the utility’s lower-ranking debt has made a competing offer to provide their own £3bn loan at a lower 8 per cent interest rate and with fewer strings attached.

The two sets of bondholders include large asset managers such as BlackRock — which is in both groups through investments in separately managed funds — but the competing offers have also pitched a number of specialist distressed debt investors against one another. Elliott is joined by fellow US hedge funds Silver Point Capital and GoldenTree Asset Management in the so-called class A bonds and the likes of London-based credit fund Polus Capital Management hold the class B debt.

The fact that the utility, which provides water and sewerage services to 16mn customers in and around London, is now host to a fight between some of the US and Europe’s biggest debt specialists underscores its fall from grace in debt markets.

Thames Water’s near £19bn of debt was once viewed as among the safest investments in the sterling corporate bond market, due to the regulated regional monopoly’s predictable revenue stream. But now credit rating agencies have downgraded the utility to the lowest reaches of junk.

While both proposed loans have been pitched as short-term solutions to keep Thames Water afloat while it tries to raise at least another £3bn in fresh equity from new investors, some campaigners fear it could saddle the company with even more expensive debt to the detriment of its customers.

Feargal Sharkey, the former rock musician who now campaigns for cleaner water in Britain and is fiercely critical of industry regulator Ofwat, said that “customers would pay for this as more of their bills get eaten by savage lenders”.

“Ofwat seems content to allow Thames Water’s debilitated corpse to implode under even yet more debt,” he said, “while the vulture capitalists and banks look on, licking their lips, eager for a quick buck.”

A spokesperson for the class A bondholders said that their loan offer “is open to all creditors” and that they want to “give Thames the best opportunity to attract the new equity it needs and allow for a full recapitalisation and successful turnaround”.

A spokesperson for the class B bondholders said that their financing offer was “drastically cheaper, more flexible and more substantial than the expensive loan proposed by the class A [group]”.

Ofwat said: “’We have been pushing Thames Water to make significant improvements in its operational performance and financial resilience for some time.”

“The company has made a request for a substantial increase in expenditure as part of the current price review process. We are reviewing that request and the supporting information provided, and will announce our final decisions in December.”

People close to the class A bondholders argue that their overall deal will lessen the company’s immediate debt repayment burden, due to a maturity extension that Thames Water would simultaneously gain from lenders, while freeing up hundreds of millions of pounds of cash currently trapped in reserve accounts.

The interest on the new debt would be funded from the proceeds of the loan itself rather than customer bills, those people also claimed.

But it is also true that there is the potential for instant profits to the funds that participate: traders have already started quoting conditional prices on the new debt showing that they will buy and sell it well above face value.

The class B bondholders, meanwhile, have said that Thames Water has not given a fair hearing to their offer, which they estimate could save the utility hundreds of millions of pounds.

“They said ‘it’s all too little too late’,” one bondholder said. 

Credit funds such as Sculptor Capital Management and Marathon Asset Management are among the funds that have provided commitments to fund the class B group’s loan, according to people familiar with the matter.

Sculptor declined to comment. Marathon did not respond to a request seeking comment.

Zimmer Partners — a US investment firm that specialises in utilities and infrastructure — is one of the biggest funders of the rival loan offer, the people added. The New York-based firm has experience in providing rescue financing to troubled utilities, having provided $675mn of equity to bankrupt Californian electricity company PG&E in 2020.

PG&E’s bankruptcy also prompted a tussle between hedge funds that saw Elliott and Zimmer sit in opposing camps, with the former firm unsuccessfully pursuing legal action against the company for allegedly snubbing Elliott from participating in a $2bn equity raise.

Elliott and Zimmer also declined to comment.

While there are heavyweight firms on both sides, the class B bondholders are relative minnows in Thames Water’s debt stack, accounting for £1.4bn of its borrowing versus £16bn of class A debt. The class A bondholders would be paid ahead of any class B if the utility were to become insolvent, while the new loan would rank ahead of both classes of existing debt.

Even though the class B bondholders are offering cheaper terms, their proposed loan would still need approval from class A bondholders. This could prove a sticking point.

The class B group said on Thursday that it was calling on “all of the company’s other creditors to support this committed financing [ . . .] rather than needlessly paying lenders interest on expensive debt with money that could be spent investing in the water and wastewater supplies of London and the Thames Valley”.

If either loan goes through, it will allow Thames Water to keep running while Ofwat agrees a five-year regulatory settlement over customer bills, which is expected to be announced in December or early January.

It will also give the utility breathing room to potentially challenge the regulator with the Competition and Markets Authority if the settlement disappoints. The company has asked for a 53 per cent increase in bills by 2030.

“If they raise £3bn debt, this should get you to the other side of any CMA referral, so the can may be well and truly kicked down the road,” said Dominic Nash, an analyst at Barclays.

The equity process is being run separately by Rothschild with final bids due early in the new year. Potential bidders including Castle Water, which already handles Thames Water’s business customers, and US private equity firm KKR are carrying out due diligence on the deal, according to two people familiar with the situation.

Some have argued that an onerous new loan or a messy dispute between bondholders could make Thames Water less appealing to potential investors, however.

“If that exploitative deal is agreed we will definitely consider walking away,” said one potential equity investor.

The bondholders declined to comment. Thames Water did not respond to a request seeking comment.

But while the two groups of bondholders are at odds over which loan deal goes through, they are unified in their determination to avoid the renationalisation of Thames Water under the government’s special administration regime.

With any new funding from the government ranking ahead of their debt in that process, special administration would have the potential for inflicting large losses even on hedge funds that scooped up Thames Water’s debt for pennies on the pound.

- Reiterates that housing inflation will take a while to come down all the way

- Have made progress but want to get the job done on inflation

- Not concerned about the dynamic in Washington between the Fed and the incoming Trump Admin

- Deficit and debt levels are up to Congress and the President

- All things being equal, if tax cuts are paid for they are less likely to cause inflation