Dealmaking Trends Post-U.S. Presidential Election

Lindsey Wendler:

Thanks for having me, Elana.

Elana Margulies-Snyderman:

Absolutely Lindsey. So to kick off the conversation, tell us a little about your background, your practice at 414 Capital, including your client base, the types of transaction related services your group provides to clients and whatever else you want to say.

Lindsey Wendler:

Sure. Okay. Again, I'm Lindsey Wendler. I'm a managing director at 414 Capital. We are an international middle market investment bank and we really have three main areas of focus. So buy-side and sell-side, mergers and acquisition advisory, valuation and consulting, and then private placements, but mostly for Latin American funds. I'm focused on U.S. businesses, mostly on the sell-side, meaning I help business owners sell all or part of their businesses to create liquidity events or I help them partner with private equity to grow. I work with family and founder owned businesses that are typically 20 to 200 million in revenue across a wide array of industries. I'm industry agnostic, but I do happen to do a lot of work in industrial, so manufacturing and distribution companies as well as facility and residential services like roofing, plumbing, landscaping. And I've worked across plenty of other industries as well, like professional services and consumer products. For me, it's really more about the size and stage of the business rather than the specific industry.

Elana Margulies-Snyderman:

Lindsey, as a follow-up with the U.S. presidential election and Donald Trump winning, how if at all is M&A and the deal making landscape expected to be impacted?

Lindsey Wendler:

I think it was a pretty unexpected result with the Republican sweep. In fact, leading up to this discussion, I really had no idea who we would be talking about today. Anyway, I asked a lot of people prior to the election on the buy-side, on the sell-side, service providers, I asked them how they thought the election would impact M&A. And the overwhelming response I got over and over again was that a lot of people thought it wouldn't affect M&A at all. That being said, it seems like the minute Trump was declared the winner, the tone changed significantly. The market rallied, and it seemed like a lot of people now feel like the Trump administration will have a favorable impact on M&A. But before getting into how the administration might affect M&A, I think it's important to at least acknowledge some of the macro factors that affect dealmaking and they include interest rates, taxes, regulations, inflation, economic growth, availability of capital, market volatility and uncertainty. Now with interest rates coming down and capital availability expanding and favorable tax climate, we've already seen an increase in M&A in 2024, which has created some great momentum going into 2025. In fact, deal value is up in the first half of this year 12% on a year-over-year basis. And compared to the old normal years of 2017 through 2019, deal value is up 25% and deal count is up 45%. So based on the first half of this year's activity, it is possible that 2024 might be the third-highest deal making year on record for USP middle markets. And all of this data is from PitchBook and it shows that 2024 was already lifting us out of the doldrums of 2022 and 2023. And you might wonder why 2022 and 2023 were slow years for M&A and it's really due to a number of challenges we experienced including but certainly not limited to inflation, rising interest rates, post-COVID supply chain shortages, the Silicon Valley Bank, First Republic Signature Bank failures and plenty more. And all of these issues created a really volatile environment for business and capital markets, and that made it difficult to get deals done. During this time, buyer valuation expectations dropped while seller expectations remained high after seeing their peers sell their businesses at record highs in 2021. Now since the beginning of this year, we're getting back on track with a lot of these macro drivers and with the new administration it's possible that lower taxes and more modest FTC regulation could help drive M&A further forward. That being said, there is a wild card. It's hard to know how proposed tariffs will actually turn out and what their effect on M&A will be.

Elana Margulies-Snyderman:

Lindsey, as a follow-up, has your outlook for dealmaking and M&A activity for next year changed since the results of the election were announced?

Lindsey Wendler:

Well, I, like many investment bankers tend to always be almost overly optimistic about what's coming next. But again, there is a lot of evidence to support this sentiment. We've had some good momentum going into 2025, which should be complemented by a continued decrease in interest rates, strong availability of capital, both in dry powder, in private funds, as well as in the debt markets, as well as manageable inflation. And the fact that we'll likely see tax stability or even lowering, which should be favorable for M&A. Regulatory issues could also soften in 2025. The Biden Administration has had an extremely active stance on antitrust enforcement. This has caused a lot of M&A to halt or even fall apart. It's been widespread and not necessarily just focused on the usual suspects of healthcare or big tech. One example of this active antitrust enforcement is a case where recently a judge prevented the merger of Michael Kors and Coach on the basis that it would create an anti-competitive environment in the affordable handbag and apparel space. And I just thought this case was so interesting because we're dealing with completely discretionary and some would say luxury items where you might not think the public would really need to be protected, but it's just one example of many deals that were blocked by the Biden Administration. Well, antitrust enforcement really hasn't affected my personal practice in the lower middle market. It does affect the overall M&A ecosystem. But back to tariffs in 2025, it's really unclear exactly which tariffs will be enacted and to what extent. Any tariffs will likely have a dampening effect on certain areas of M&A. But we really won't be able to predict any outcomes until we know more. Overall, though, I think 2025 is looking really positive for M&A.

Elana Margulies-Snyderman:

Lindsey, as a follow-up, what do you think both the buy-side and the sell-side will be looking at with respect to transactions next year?

Lindsey Wendler:

I personally think that the buy-side will be looking at more platform investments in 2025. There are a lot of good tailwinds, which we've discussed for M&A going forward, and the data shows that most transactions over the last few years have been focused on add-ons. Even this year with deal value up 25% and deal count up 45%, one would assume that this means on the whole smaller deals are getting done. I think it'll be exciting to see if this changes as macro drivers continue to change. A more robust M&A market would also make it easier for the buy-side to exit their current investments, which would create more opportunities for raising more capital for new funds, which could spur additional M&A activity in the future. On the sell-side, I think you'll see more sellers interested in going to market. There have seemingly been a lot of sellers waiting on the sidelines until the market picked up and valuations stabilized from their peak in '21 to the lower valuations of 2022 and '23. A lot of other dealmakers that I've spoken to say they're already seeing sellers come out of the woodwork with an interest in going to market in 2025, which has also been my experience. Something I think that might've been interesting to see under a Harris administration would've been whether or not there would've been a boom in M&A in 2025 ahead of likely tax increases. We saw this in 2021 when the Biden administration essentially proposed doubling capital gains taxes, and we had sellers running to sell before the end of that year. This is obviously no longer an issue. I just thought it would've been interesting to see if a similar situation would've played out.

Elana Margulies-Snyderman:

Lindsey, are there any specific industries or transactions that you believe will be most impacted, both positively and negatively looking ahead?

Lindsey Wendler:

Yeah, I think larger deals that have been or would've been under antitrust scrutiny will have a much better chance of going through. That being said, the last Trump Administration had active antitrust enforcement as well. In fact, an article by the American Bar Association noted that in 2020, the number of merger challenges exceeded any year of the Obama Administration. However, since then the Biden Administration has continued and amplified this trend. We could also maybe assume that there may be more activity in oil and gas and less in renewables, but that would be a pretty blanket generalization, and it's really hard to say which industries will be standouts in either direction at this point.

Elana Margulies-Snyderman:

Lindsey, we found that some of the key deal points have been evolving with the overall regulatory, economic, financing and M&A environment, and I wanted to ask you, what are some of the more significant changes in deal points you were seeing in both buy and sell-side transactions?

Lindsey Wendler:

So it seems like deal structure over the last few years, I'd say since 2021, have increased with more earnouts, seller notes, rolled equity, which has likely been due to buyers really wanting to manage risk in uncertain times, but maybe also because of a lack of availability of debt capital. However, with a more competitive M&A market and more access to capital, heavy deal structures will likely moderate. Overall, I think it'd be fair to assume that the current momentum in M&A coupled with the new administration, should be positive for both the sell-side and buy-side and could likely lighten deal structures.

Elana Margulies-Snyderman:

Lindsey, to shift gears, love to hear your thoughts on the due diligence process with respect to deal making and any anticipated trends you expect to see for 2025.

Lindsey Wendler:

Yeah, it really seems like the due diligence process has increased a lot in the last two years, maybe especially since COVID. I have felt this personally and I've had a lot of conversations with other deal makers about it. In fact, I'm even on a conference planning committee and someone suggested making it a topic of a panel discussion for an upcoming conference. It just feels like due diligence is getting longer and longer with more hoops to jump through. And part of this could have been the perceived higher risk environment post COVID, and part of it could be due to more service providers offering more services. And I think once investors have a process they believe in and works for them, they're not going to take away from it. They're not going backwards. If anything, they'll add to it as they see necessary. So this is probably the norm for due diligence for now. This is also probably why more and more sell-side processes include sell-side quality of earnings reports. Doing this level of due diligence upfront seems to make a transaction much smoother and creates less opportunities for surprises that might kill a deal. I mean, I really try to get all of my sell-side clients to do quality of earnings reports prior to a process because it makes a big difference in the probability of any issues coming up during a process.

Elana Margulies-Snyderman:

Lindsey, we've covered a lot of ground today and wanted to see if you have any final thoughts or advice on transactions you would like to share with us today.

Lindsey Wendler:

Final thoughts. Again, as an investment banker, I feel really positively about 2025. I think M&A would've done pretty well under either administration, but I think that the Trump administration's tax and regulatory stance might fuel additional activity that we might not have otherwise seen. And all in all, I'm looking forward to seeing what happens.

Elana Margulies-Snyderman:

Lindsey, I wanted to thank you so much for sharing your perspective with our listeners.

Lindsey Wendler:

Thanks so much for having me, Elana,

Elana Margulies-Snyderman:

And thank you for listening to the Eisner Amper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next Eisner Amper podcast when we get down to business.

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