‘Chilling effect’? Finance pros differ on possible outcomes of Biden calls to rein in M&A – Crain’s Detroit Business

Practitioners in the red-hot mergers and acquisition space have differing opinions on the potential impact of a recent executive order by President Joe Biden calling for, among other things, added scrutiny on “bad mergers.”

The order, which aims to promote “competition in the American economy,” was signed July 9. It seeks to embolden federal regulatory agencies across a wide spectrum of industries, including health care and finance.

“The executive order I’m soon going to be signing commits the federal government to full and aggressive enforcement of our antitrust laws,” Biden said in remarks ahead of signing the order. “No more tolerance for abusive actions by monopolies. No more bad mergers that lead to mass layoffs, higher prices, fewer options for workers and consumers alike.”

But to those working in the M&A space around Michigan, which has been going gangbusters despite the economic hit of the COVID-19 pandemic, the impact of such policy shifts is still somewhat unknown.

Additionally, the order “encourages” federal agencies like the Department of Justice and the Federal Trade Commission focused on antitrust issues “to focus enforcement efforts on problems in key markets and coordinates other agencies’ ongoing response to corporate consolidation,” according to a fact sheet from the Biden administration.

It’s the use of language like “encourage” that has financial sources guessing that any major slowdown would be quite far down the road.

Several experts, including Jeffrey LaBine, a corporate partner focused on mergers and acquisitions for the Detroit-based Miller Canfield Paddock & Stone PLC law firm, noted that the order by the Biden administration does nothing to change the underlying dynamics that drive corporate dealmaking.

In fact, LaBine said that in the short term he expects companies to push forward with more merger activity out of an abundance of caution that the Biden administration might get more heavy-handed down the road.

“You could see, in the short-term, some acceleration (of M&A activity),” LaBine said. “Longer-term, some additional kind of navigation planning and some additional speed bumps, but not dead ends. And they’re not dead ends simply because the drivers haven’t changed.”

LaBine and other M&A attorneys contacted for this report were quick to note that at least so far, clients have not been racing to pick up the phone out of concern that the M&A market might implode.Far from it in fact, according to Michael Bell, co-leader of the financial institutions practice group at the Detroit-based Honigman LLP law firm, who focuses primarily on bank M&A.

Smaller banks still need scale to compete, and larger banks feel the need to continue growing, he said.

“There’s multiple reasons why the market moves and this (executive order) doesn’t stop any of those reasons, or change them,” Bell said. “I think there’s merit in these changes (within the order), perhaps. But it doesn’t change the reasons that these (M&A) deals occur, and they’re going to keep occurring.”

The executive order “affirms that it is the policy of (the Biden) Administration to enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony — especially as these issues arise in labor markets, agricultural markets, Internet platform industries, healthcare markets (including insurance, hospital, and prescription drug markets), repair markets, and United States markets directly affected by foreign cartel activity.”

Banks have turned to mergers and acquisitions to contend with the financial impacts of ultra-low interest rates and the need for heightened technology spending. The M&A surge was just restarting in the U.S. after largely being on pause during the height of the pandemic.

U.S. banks have announced $47 billion worth of deals this year alone, more than the $45 billion announced in all of 2020, Bloomberg reported. That includes New York Community Bancorp Inc.’s planned purchase of Flagstar Bancorp Inc. for $2.54 billion.

To what extent the order does put a damper on M&A activity, experts say it’s likely to be uneven.

One financial source told Crain’s that they foresee stalled M&A activity at the higher end of the spectrum, known as the “bulge bracket,” which would then move downstream.

“I think it will have a chilling effect,” said Alex Conti, the managing director for corporate finance in the Farmington Hills office of tax consulting firm UHY LLP.

“The bulge bracket kind of sets the stage for the middle market and below,” Conti said. “If large corporates are sort of deterred from growing through M&A, the private equity at that upper end is going to take note. They’re not going to invest unless they have an exit strategy. If they believe they won’t be able to realize an investment, they’re unlikely to move forward on the front end.”

Conti noted that he’s skeptical that the all-stock $26 billion merger of wireless giants T-Mobile and Sprint, completed in 2020, would have passed through the Biden administration given current rhetoric.

On a more local level, he said that the proposed merger between Grand Rapids-based Spectrum Health and Beaumont Health in Southfield makes for a “great example” of the type of deal that’s likely to draw scrutiny. The potential benefits of the deal, proposed last month, remain unclear, as Crain’s has previously reported.

The health systems’ proposed merger makes for “an example where a provider is trying to get stronger to drive up rates on payers,” Conti said.

The challenge, he noted, is that “anti-competitive” is something that is difficult for regulators to measure.

“At the end of the day with the FTC, you’re in sort of subjective territory to say that something is anti-competitive,” Conti said. “There’s not like a measuring stick that you use.”

The hesitancy on the part of larger, corporate players mentioned by Conti could actually lead to opportunity for middle-market companies, said Andrew Dickow, managing director at Greenwich Capital Group, a Birmingham investment bank.

“I actually think it’s going to be a boon for them just because some of these larger companies are going to have to get more tactical on making smaller bets on innovations, because there’s so much scrutiny on the horizontal and vertical merger guidelines now,” Dickow told Crain’s. “I think you’ll see a lot more smaller deals … and just trying to have it be complementary to organic growth.”