by Thomas Zadvydas and Mark Andress
For the tech industry, the US presidential and general elections place the focus on three main areas, regardless of whether Joe Biden or Donald Trump wins.
Tax policy has already shaped M&A and looks set to continue to do so; regulatory policy has put Big Tech in the crosshairs whoever is victorious; and foreign policy will determine the direction of the technology "cold war" between the US and China.
1. Tax fears spur deal flow
TMT dealmakers have seen an acceleration in M&A and expect that to continue until year-end – whoever wins.
One reason is that dealmaking, paused by the pandemic in 2Q20, has resumed alongside the stock market’s recovery. But a major driver is the specter of tax increases under a Democratic administration.
Many are rushing to get transactions closed while the current regulations are still on the books and before a Biden presidency potentially changes tax code provisions in 2021 or beyond.
“A Democratic [administration] could mean more regulation, higher taxes,” said Lami Ajibesin, managing director of the transaction advisory services practice at accounting firm Anchin. “It could be better to get a deal done before year-end.”
Conversely, a Trump win would mean “less uncertainty, less regulation, less taxes” which is “a good thing for the M&A market,” a tech banker said.
The rush to transact is particularly true at tech businesses controlled by founders looking for liquidity under today’s more advantageous tax code. “We definitely do see folks trying to get ahead of it,” said Wayne Kawarabayashi, head of M&A at tech advisory shop Union Square Advisors.
The tax issue also has been driving deals among venture capital and private equity-backed companies, particularly among those where management still holds significant equity and is looking to cash out, he said. “Now is a good time because they at least know what they are getting into.”
The tech banker said it also makes sense for sellers to take advantage of high stock market values and healthy multiples seen in recent tech deals.
But a Biden victory won’t change regulations overnight, leaving leeway for plenty more M&A to spill into next year. “Tax codes, tax rates, tax treatment … take a while to change,” said Mark Williams, Americas CRO of data room provider Datasite. “It won’t be a light switch-type moment.”
Irrespective of who wins, private equity firms – which historically have been EBITDA buyers but are increasingly becoming revenue-multiple buyers – are holding enormous amounts of cash and will find a way to participate, said Kawarabayashi. They will invest in areas with high recurring revenue and large addressable markets that have done well in the pandemic like online delivery, telemedicine, enterprise software, video collaboration, automation, cloud infrastructure and security, he said.
The low interest rate environment is expected to remain for a number of years and will result in more PE deals going forward, predicted Steve Murphy, CEO of Epicor Software, an enterprise software vendor that recently sold to PE firm Clayton, Dubilier & Rice (CD&R).
“There’s going to be a lot of private equity deals because you can get debt at reasonable terms,” Murphy said.
2. Regulatory appetite places Big Tech in crosshairs
Concern about the market power of large online platforms has received bipartisan support. Whoever wins the White House, the Big Tech companies Alphabet [NASDAQ:GOOG], Amazon [NASDAQ:AMZN], Apple [NASDAQ:AAPL], Facebook [NASDAQ:FB] and Microsoft [NASDAQ:MSFT] will remain under the microscope.
Under President Trump and the Democrat-controlled House, Big Tech has faced scrutiny – most notably the Department of Justice’s (DoJ) antitrust lawsuit in September against Alphabet charging it of maintaining monopoly power in general online search services and search advertising practices. Other online technology companies could follow and Trump is expected to maintain his hardline stance on the industry.
Under a Biden presidency, some dealmakers and executives think a breakup of at least one of the Big Tech firms is possible. During the Democratic primaries last year, Biden spoke of the need to take “a really hard look” at breaking up large technology companies like Facebook.
At the very least, there will be demands for greater transparency around how Big Tech operates, said Anchin’s Ajibesin. For Google, that means more transparency about how the company generates search results, drives revenue and steers consumers in certain ways; while for Facebook, the focus will be on personal information and privacy. “More emphasis on transparency could come in a new administration,” she said.
One antitrust lawyer said “a blind spot” for many businesses is that the government can – even now under current antitrust law – challenge a wide variety of conduct and any previous acquisition on the premise that it is anticompetitive. But the law could get rewritten under a Biden presidency too.
In a foretaste of that, House members grilled the CEOs of Alphabet’s Google, Amazon, Apple and Facebook in late July in what some dealmakers saw as a curtain-raiser to the kind of greater oversight expected under a Biden presidency. The House Judiciary Committee’s antitrust subcommittee then issued its report 6 October that suggested break-ups and greater antitrust oversight.
The lawyer said a “decent swath” of the House’s proposals – such as public interest standards and potential triggers for bars on mergers – could find support on the floor of the House, although not in this legislative session. “It could be a pretty watershed moment for anti-trust law,” said the lawyer.
3. US-China technology cold war
Cross-border M&A and Chinese investments into US technology have been impacted by the increased protectionist stance of the Trump administration.
A big part of that is the expanded jurisdiction of the Committee on Foreign Investment in the US (CFIUS), the multi-agency panel that monitors foreign investments for potential national security risks.
Under regulations that went into effect in February, CFIUS can scrutinize minority investments in US companies that collect personal data of US citizens, or are involved in critical technologies or infrastructure, and it is a shift that has impacted Chinese investments in Silicon Valley.
Citing national security concerns, Trump issued two separate executive orders in August banning US companies from doing business with Chinese-owned apps TikTok and Tencent-owned [HKG:0700] WeChat. To avert a ban, TikTok then formed a partnership with Cisco [NASDAQ:CSCO] and Walmart [NYSE:WMT].
Wedbush Securities, in a note on Monday, called the “technology cold war” between the US and China “one of the biggest risks to tech stocks.” The tensions could result in retaliatory measures from China that will negatively impact Apple, Cisco and Intel [NASDAQ:INTC].
“A lot of that cross-border activity with China has been and could continue to be muted as a result,” said Union Square’s Kawarabayashi.
The central question is whether the US continues to take a tough line with China or whether a Democratic White House takes a more conciliatory tone. “It’s unclear,” Kawarabayashi said. “That is something that will weigh on and impact M&A activity going forward.”