The 2024 presidential election and President-elect Donald Trump is headed back to Washington. The Republican party also won control of the Senate and the House of Representatives.
If Trump’s previous tenure in the Oval Office is an indicator for what can be expected, there’s a good chance for a less stringent regulatory environment.
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One of my big predictions under a Trump presidency is that mergers and acquisitions (M&A) will see a notable uptick. Below, I’ll explain the factors that inhibited deal activity in recent years and make the case for why M&A could make a comeback. In addition, I’ll outline why Viking Therapeutics(NASDAQ: VKTX) is an obvious acquisition candidate.
Before I became a writer at The Motley Fool, I spent a decade working on M&A deals at investment banks and start-ups. While companies are always curious about what strategic opportunities are out there, there are a number of factors that determine whether an acquisition makes financial sense.
During the past few years, M&A deal flow has been particularly sensitive to the following:
Interest rates: Between March 2022 and July 2023, the Federal Reserve raised interest rates a total of 11 times. Broadly speaking, companies rarely have enough cash on the balance sheet to finance a large-scale acquisition (deals in excess of $10 billion). In these circumstances, a company will turn to a bank or group of banks that lend the business capital to fund the deal. However, such an approach to dealmaking has been less appealing in recent years due to the high-interest-rate environment.
Inflation: The Fed’s consistent rate hikes were aimed at curbing inflation, which reached relatively high levels in the past few years. An inflationary environment isn’t the best time to make an acquisition as it just adds another layer of complexity during an otherwise challenging time to navigate.
Valuation: Despite a tough macroeconomic environment, the stock market has remained resilient. The S&P 500 has hit 50 record highs just this year. With valuations soaring across all industry sectors, it makes sense for acquisition appetites to dwindle. Companies want to avoid taking on expensive debt and overpaying for an asset.
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I see two catalysts that could reignite M&A under the Trump administration. First, back in September, the Fed finally started cutting interest rates. The initial 50-basis-point reduction was complemented by another 0.25% earlier this month. This all comes as inflation rates continue to show signs of cooling after peaking at about 9% back in the summer of 2022.
The second reason I think M&A could see an uptick under a Trump White House is due to changes I think he’ll make inside the federal government. Specifically, I don’t think Lina Khan, chairwoman of the Federal Trade Commission (FTC), is going to remain in her position under a Republic-controlled Congress.
During the past four years, Khan has resisted many big-ticket acquisitions — consistently citing antitrust concerns. Although there are legitimate arguments to be made over heightened regulatory scrutiny, acquisitions can be a very good thing if executed smoothly (I do hold a slight bias given my experience).
Viking is a clinical-stage pharmaceutical company that’s looking to enter the piping hot weight loss market. The company has a number of compelling obesity medication candidates, one of which could be a real disruptor to weight loss market incumbents such as Novo Nordisk and Eli Lilly.
Jared Holz, a research analyst at Mizuho, recently implied that big pharma companies looking to encroach on Novo and Lilly may be willing to pay in the ballpark of $15 billion for Viking. Considering Viking’s current market cap sits at about $6.2 billion, Holz’s outlook suggests there could be some major upside should the company be acquired.
Given that Viking is still an early-stage company and doesn’t yet have consistent revenue, the company may be eager to partner or join forces with a larger player that can help with costs related to clinical trials or even manufacturing capabilities.
With all of this said, it’s important to keep in mind that everything discussed here is speculation. There’s no guarantee that M&A deals will rebound under the new Trump administration, nor is there any firm evidence of Chairwoman Khan being replaced. Even if Viking receives interest from bigger pharmaceutical companies, there’s always a chance the two parties won’t agree on a price and a potential deal falls apart.
Given the above, I wouldn’t encourage investing in Viking stock purely based on speculation that it could get bought out for a premium.
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