When stock futures plummeted over night as the surprising presidential election returns rolled in, bankers in the middle of buying or selling a bank, or raising capital, or poised to do any of those things, probably uttered a collective, "Oh, boy."
After all, expectations of relatively predictable stock valuations underlie such transactions.
Futures losses were soon pared as market participants adjusted to the news of Donald Trump's victory, and by midday Wednesday stocks had rallied after a small opening drop. But the fluctuations added to, and served as a reminder of, the volatility that had occurred this year and had been forecast to continue. The Brexit vote, oil prices, elections and global conflicts have been among the destabilizing factors.
"When you have uncertainty, you will have market volatility," said Michael Iannaccone, senior advisor at Tangent Capital Partners. "I would expect there to be more volatility going forward."
And that usually slows bank consolidation. But there are steps banks can take to protect themselves if they are looking to make an acquisition. And there are scenarios where the Trump presidency could help spur deal activity, industry experts said.
In general, a stronger stock market means that buyers have a better currency to pay to potential sellers, if a deal includes stock, and it can spur consolidation. But when there are wild swings, sellers become less certain about the price they are getting paid and they may pause before signing a deal or they may seek more cash.
There could be more swings in the coming weeks and months as Trump's policies regarding trade agreements and key financial regulation, such as the Dodd-Frank Act, become clearer.
For example, even if Trump fulfills a promise to repeal Dodd-Frank, legislation that is largely reviled by banks, doing so would presumably take time and introduce new political risks.
"If you match up what Trump has said about trade agreements, the markets are jittery about that," said Tom Rudkin, a principal at DD&F Consulting. "What happens if he ends those agreements? What will the new ones look like? The stock market doesn't like uncertainty, and he has introduced some uncertainty."
Conditions could prompt more of a focus on floors and ceilings on the exchange ratios in deals involving stock swaps so both the buyer and the seller are protected from large market fluctuations.
"It is a means of controlling volatility in terms of what shareholders at the selling bank get," said Chip MacDonald, a partner at Jones Day.
A stock market that is fluctuating could also affect banks looking to do a capital raise. However, bank advisers generally said they would tell clients to proceed with their plans despite the market uncertainty.
"What happened last night was huge in the political world, but in terms of a business perspective you have to run your business," said Greyson Tuck, an investment banking adviser at the law firm of Gerrish McCreary Smith. "You can't let the election stop your strategic plans."
Still, some experts thought Trump's win could be an overall positive for the industry since he seemed more likely to lighten regulatory burden than his rival, Hillary Clinton. But how the possible repeal of or changes to Dodd-Frank could affect the number and pricing of deals remains to be seen, Tuck said.
For one, less regulation could mean that potential buyers can focus more on strategic initiatives, such as buying other institutions, Tuck said. But that would also reduce many of the pressures for banks to sell. A supply and demand imbalance between buyers and sellers could lead to higher pricing, he added.
"I really could advocate on this either way," Tuck said. "But that's also assuming there is a change. But we won't know to what extent" for a while.
Experts warned that it could take months and maybe even years for the industry to feel any effects from reductions in regulation. Because of that, the number of deals announced in 2017 is likely to remain stable compared with this year or rebound slightly, sources said. Banks will continue to look for earning assets, especially if interest rates remain the same, MacDonald said.
"Obviously the election was not what the market had expected, so there will undoubtedly be some volatility," said Charles Crowley, a managing director at Boenning & Scattergood. Yet "M&A activity will go on."