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Justin Hibbard
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November 08, 2006

Dealmakers prepare for new era on Capitol Hill

Steve Rosenbush

The breadth of the Democratic victory at the polls on Tuesday took many financial executives by surprise. The outcome of the midterm election created uncertainties for dealmakers in M&A, hedge funds and private equity. "A Democratic Senate was not expected by the markets, and it's going to take some time to figure out what it means," said Sander Gerber, chairman of XTF Advisors, a $200 million fund that builds and manages portfolios of exchange-traded funds. The shift of power from Republicans to Democrats in the House was pretty much to be expected. "But the idea of the Senate flipping took people by surprise," one senior Beltway-based financial executive said.

The post-election tone for M&A was evident almost right away. On Wednesday, House Democrat John Dingell asked the Federal Communications Commission, which is supposed to operate independently from Congress, to hold off on judging the proposed AT&T-BellSouth merger until the new Congress is seated. "I think that's a sign of what is to come," Gerber said.

The question now is whether the new Democratic era will have a significant impact on the historic boom in M&A. Private equity has been particularly hot. The volume of private equity deals for the first 10 months of 2006 has broken the all-time full-year high, which was established in 2000. link.

One finance industry executive based in Washington said the current deal environment is good and that he doesn't expect it to get worse as the result of a Democratic house. But some big changes are likely. Here's a look at how the election may shape the environment for M&A, private equity and hedge funds.

Senate Banking Committee: It's expected that Senator Chris Dodd will succeed Sen. Richard Shelby as chairman of the Senate banking committee. Dodd, a Democrat from Connecticut, is considered to be more comfortable with the banking world. His leadership of the committee may be a net plus for the M&A world. Shelby, a Republican from Alabama, has been regarded as something of a populist. Change here could be a plus, one investment banking expert said.

House Financial Services Committee: Rep. Barney Frank, a Democrat from Massachusetts, is expected to succeed Republican Michael Oxley of Ohio. That means prospects for easing Sarbanes-Oxley regulations on corporate financial reporting in a significant way are reduced. Frank has indicated he may be amenable to some reform, though.

Hedge funds and private equity: There may likely be a push in the House and Senate for regulations that would increase the amount of information that hedge funds and private equity firms must share with the public. "That may very well protect investors from funds that blow up, but it could hurt the economy at the same time," Gerber said. Return on investments could decline as players are required to share strategies, allowing rivals to copy their moves. And if regulation becomes too tough, fund managers could leave the U.S. for offshore destinations. London already is luring business from New York.

Globalization: One Washington financial executive said it will be harder to strike new trade agreements, such as the one contemplated with Korea. Trying to control the globalization of markets could have a beneficial effect on some U.S. industries, at least for the short term. But the longer effect could be a drag on economic growth and deal-making, some industry insiders say.

With the House and the Senate under their control, the Democrats will be able to execute their financial and economic agenda. While health care, college savings and the minimum wage are at the top of their agenda, an energized Democratic Congress will likely find time to tighten regulations. Some investors are particularly worried that Democrats will end some of the capital gains tax cut. That could have a significant effect on markets such as private equity. The reduction in capital gains taxes was a factor in the recent surge in deal volume.

Investors and deal makers will be watching the new Congress just as carefully as the new Congresss watches them.

12:53 PM


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