Rising inflation expectations and a potential trade war are impacting the current deal environment. According to recent data from the Wall Street Journal, the deal market has experienced a quiet start to the year, with approximately 900 U.S. deals announced in January, a decline from the 1,200 transactions seen last year and 1,500+ deals two years ago. This slowdown can likely be attributed to companies shifting their priorities from making deals to navigating tariffs and other policy issues.

Impact of Tariffs and Policy Uncertainty on M&A Activity

The anticipated increase in M&A activity for 2025, driven by deregulation and tax cuts, has yet to materialize. However, historically, M&A activity in the U.S. tends to increase at the start of the second quarter after an election year. Sentiments from VRC’s corporate and private equity clients expect more activity later this year once there is more clarity regarding U.S. tax and trade policy. This clarity may take some time to emerge, as according to the Trump Administration’s America First Trade Policy memorandum issued on January 20, 2025, certain federal agencies and the United States Trade Representative (USTR) were directed to evaluate key aspects of U.S. trade policy and issue reports to the president no later than April 30, 2025.

The Treasury Secretary and the USTR have been directed to investigate whether foreign countries are subjecting U.S. or foreign corporations to discriminatory or extraterritorial taxes and to develop a list of options for protective measures that the U.S. should adopt by April 1, 2025.

These measures could include tariffs, some of which have already been implemented and others that may soon be implemented, or the application of IRC Section 891, which doubles tax rates on foreign citizens and corporations if U.S. corporations are subjected to discriminatory or extraterritorial taxes. As part of the investigation, the USTR is seeking public comments on unfair trade or non-reciprocal foreign trade practices by March 11, 2025.

What to Expect in the Coming Months

As we continue to navigate the current deal environment and potential policy changes, VRC remains a trusted company resource, providing expertise on valuation and transfer pricing requirements. We will closely monitor developments and provide updates on the impact of these changes on M&A activity. Clients can expect more clarity on U.S. tax and trade policy in the coming months, which will likely influence their M&A strategies. We welcome you to contact the article author, Tom Gottfried, Managing Director of VRC’s National Tax Valuation practice group, or connect with another VRC professional near you.