The 2024 presidential election and President-elect Donald Trump returns to Washington. The Republican Party also won control of the Senate and House of Representatives.
If Trump’s previous tenure in the Oval Office is any indicator of what to expect, there’s a good chance of a less stringent regulatory environment.
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One of my big predictions under the Trump presidency is that mergers and acquisitions (M&A) will see a remarkable revival. Below, I’ll explain the factors that have hindered deal activity in recent years and argue why M&A could be making a comeback. I will also explain why Viking therapies (NASDAQ: VKTX) is an obvious takeover candidate.
Before becoming a writer at The Motley Fool, I spent a decade working on mergers and acquisitions at investment banks and startups. Although companies are always curious about what strategic opportunities exist, there are a number of factors that determine whether an acquisition makes financial sense.
In recent years, the flow of mergers and acquisitions has been particularly sensitive to the following:
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Interest rates: Between March 2022 and July 2023, the Federal Reserve raised interest rates a total of eleven times. In general, companies rarely have enough cash on the balance sheet to finance a large-scale acquisition (transactions over $10 billion). In these circumstances, a company will turn to a bank or group of banks to lend the company capital to finance the deal. However, such an approach to dealmaking has been less attractive in recent years due to the high interest rate environment.
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Inflation: The Fed’s consistent rate hikes have been aimed at curbing inflation, which has reached relatively high levels in recent years. An inflationary environment is not the best time to make an acquisition, as it only adds another layer of complexity in an otherwise challenging time to navigate.
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Valuation: Despite a difficult macroeconomic environment, the stock market has remained resilient. The S&P500 has already reached 50 record highs this year. With valuations rising sharply across all industry sectors, it is natural that buying appetite will wane. Companies want to avoid taking on expensive debt and overpaying for assets.
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Image source: Getty Images.
I see two catalysts that could reignite mergers and acquisitions under the Trump administration. First, the Fed finally started cutting rates in September. The initial cut of 50 basis points was supplemented by a further 0.25% earlier this month. This all comes as inflation rates continue to show signs of cooling after peaking at around 9% in the summer of 2022.
The second reason why I think mergers and acquisitions could see an uptick under the Trump White House is due to the changes I believe he will make within the federal government. Specifically, I don’t think Lina Khan, chair of the Federal Trade Commission (FTC), will retain her position under a Republican-controlled Congress.
Over the past four years, Khan has opposed many major takeovers, consistently citing antitrust concerns. While there are legitimate arguments for increased regulatory scrutiny, takeovers can be a very good thing if they are executed smoothly (I have a slight bias given my experience).
Viking is a clinical-stage pharmaceutical company looking to enter the red-hot weight loss market. The company has a number of compelling obesity drug candidates, one of which could be a real disruptor for established weight loss market players such as Novo Nordisk And Eli Lilly.
Jared Holz, a research analyst at Mizuho, recently suggested that major pharmaceutical companies seeking to infringe on Novo and Lilly may be willing to pay a $15 billion margin for Viking. Considering Viking’s current market cap is around $6.2 billion, Holz’s prospects suggest there could be a big upside if the company were to be acquired.
Given that Viking is still in its early stages and not yet generating consistent revenue, the company may be eager to partner or join forces with a larger player that can help with costs associated with clinical trials or even manufacturing capabilities.
All this said, it is important to keep in mind that everything discussed here is speculation. There is no guarantee that mergers and acquisitions will recover under the new Trump administration, nor is there any hard evidence that Chairman Khan will be replaced. Even if Viking receives interest from larger pharmaceutical companies, there’s always a chance the two sides won’t agree on price and a potential deal will fall through.
Given the above, I would not encourage investing in Viking shares based solely on the speculation that they could be bought out at a premium.
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Adam Spatacco has positions at Eli Lilly and Novo Nordisk. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
Prediction: Acquisitions will skyrocket under the Trump administration. Here’s 1 pharmaceutical company I have my eyes on. was originally published by The Motley Fool
