Anticipated Increase: Acquisitions to Reach New Heights During Trump's Administration. Spotlight on One Pharmaceutical Firm of Interest.
Anticipated Increase: Acquisitions to Reach New Heights During Trump's Administration. Spotlight on One Pharmaceutical Firm of Interest.
The 2024 presidential election is leading towards a return of President-elect Donald Trump to the White House, alongside the Republican party's control over the Senate and the House of Representatives.
I foresee a possibility of a more lenient regulatory climate based on Trump's previous term. One of my predictions for this presidency is an increase in mergers and acquisitions (M&A). Commencing, I'll discuss the factors that have hampered deal activity in recent times and why M&A could regain momentum. In addition, I'll put forward why Viking Therapeutics ('VKTX' -1.12%) is an attractive acquisition target.
Companies have been hesitant about acquisition plans
Before becoming a writer at Our Website, I worked on M&A deals for a decade at investment banks and start-ups. While businesses are always interested in exploring strategic opportunities, various factors influence whether an acquisition is financially viable.
In recent years, the M&A deal flow has been vulnerable to the following factors:
- Interest rates: The Federal Reserve increased interest rates a total of 11 times from March 2022 to July 2023. Generally, few companies possess enough available cash on their balance sheets to finance large-scale acquisitions (deals exceeeding $10 billion). In such circumstances, businesses opt for bank loans or groups of banks that provide capital for the acquisition. However, these options have been less appealing in recent years due to the high-interest-rate environment.
- Inflation: The Fed's rate hikes were aimed at curbing inflation, which reached high levels in the recent past. An inflationary environment is not an ideal time for acquisitions as it adds another layer of complexity during an already challenging period.
- Valuation: In spite of a challenging macroeconomic climate, the stock market has shown resilience. The S&P 500 hit 50 new record highs this very year. Given the skyrocketing valuations across all sectors, the appetite for acquisitions has decreased. Companies are cautious about taking on excessive debt and overpaying for an asset.
Potential changes under the Trump administration
I identify two factors that could revive M&A activity under the Trump administration. First, the Fed commenced cutting interest rates in September for the first time. This was followed by another 0.25% reduction earlier this month. Such rate reductions coincide with cooling inflation rates, which were previously at about 9% during the summer of 2022.
Secondly, I anticipate M&A could experience an increase under a Republican-led Congress due to changes within the federal government. Specifically, I doubt that Lina Khan, the chairwoman of the Federal Trade Commission (FTC), will continue in her position.
During her tenure, Khan has often obstructed significant acquisitions, citing antitrust concerns. Although there are valid arguments supporting heightened regulatory scrutiny, acquisitions can be beneficial when executed effectively (I am somewhat biased given my experience).
Why Viking Therapeutics is an ideal acquisition target
Viking is a clinical-stage pharmaceutical company aiming to enter the bustling weight loss market. The company boasts a number of compelling obesity medication candidates, one of which could potentially disrupt the market incumbents such as Novo Nordisk and Eli Lilly.
Jared Holz, a research analyst at Mizuho, recently suggested that larger pharmaceutical companies seeking to encroach on Novo and Lilly might be prepared to pay up to $15 billion for Viking. Given that Viking's current market cap stands at about $6.2 billion, Holz's outlook suggests there is substantial potential upside if the company is acquired.
Since Viking is still an early-stage company without consistent revenue, the company may be eager to affiliate with a larger company that can assist with clinical trial costs or manufacturing capabilities.
It should be noted that all the information discussed here is merely speculation. There is no guarantee that M&A deals will recover under the new administration, nor is there any concrete evidence of Chairwoman Khan being replaced. Even if Viking attracts interest from other pharmaceutical companies, there is always a chance that a deal may fail to materialize due to disagreements over pricing.
In conclusion, it would be unwise to invest in Viking stock solely based on speculation of a premium acquisition deal.
Despite the potential return of President-elect Donald Trump and the Republican party's control over the Senate and the House of Representatives, companies have been hesitant about acquisition plans due to various factors such as high interest rates, inflation, and skyrocketing valuations. However, the Fed's recent interest rate reductions and the anticipated change in leadership at the Federal Trade Commission under a Republican-led Congress could revive M&A activity, making it an opportune time for investing in companies like Viking Therapeutics that have attractive acquisition targets.