By Bryan Livingston
It’s not one single thing but a confluence of conditions that have us feeling bullish about merger and acquisition deal flow and transaction size this year. And it’s not just one industry that will benefit.
As we settle into a new year, let’s take a look at what’s got us in such a good mood about the U.S. M&A climate:
1. Tax reform. We expect sweeping, pro-business tax reform signed into law by President Trump in December to stimulate and accelerate M&A demand this year as corporations enjoy a sizable, permanent tax cut that brings the top corporate rate to 21% from 35%. McDermott, Will & Emery, a law firm that specializes in M&A, notes that tax reform changes should “reduce the tax impact of asset purchases from C corporations, particularly in instances where other attributes are available to offset gain from such transactions.”
2. Capital on hand. There’s plenty of private equity dry powder ready to be deployed and we expect it to be a significant part of the M&A landscape this year. Besides private equity, large corporations, due to tax reform, will look for ways to deploy cash on hand with M&A a likely beneficiary. While recent stock market volatility could slow the speed of transactions, it hasn’t eroded general confidence in the economy nor the expectation for turbo-charged corporate earnings.
3. Rising interest rates. Rising interest rates could spark a round of M&A activity in the financial industry, which should also benefit from the specter of loosening regulations and tax reform. While on the rise, interest rates remain not all that far off their historic lows, which will keep borrowing costs affordable for companies that finance M&A with debt.
4. Technology drivers. As business competition rises and companies consolidate, businesses of all sizes will be looking to add and improve technology offerings. That could involve adding technology-related products or services to their wheelhouse by adding complementary business lines via an M&A transaction or by acquiring technology assets that will aid in the push to become more efficient, profitable and competitive.
5. It’s the economy, stupid. The economy is humming with unemployment at 4.1 percent and wages and consumer confidence on the rise. Real gross domestic product rose at a healthy annualized rate of 2.6 percent in the fourth quarter, according to an estimate from the Bureau of Economic Analysis. Still, we’ll need to keep an eye on deficit spending. Some economists have warned that increasing the U.S. debt in an expanding economy isn’t good fiscal policy and could negatively impact the economy as soon as 2019. Goldman Sachs forecasts the U.S. debt-to-GDP ratio, now at 77 percent, will hit 85 percent by 2021.
6. Regulatory environment. We still live in a Dodd-Frank world and it’s unrealistic to expect that Dodd-Frank will be repealed in its entirety, but we do expect a certain amount of regulatory rollback, which should be a positive development for M&A activity. Still, we’ll be watching the Department of Justice’s antitrust challenge to the AT&T-Time Warner merger as the ruling may impact the landscape for mega-mergers.
7. Ingrained globalization. The North American Free Trade Act may undergo some retooling, and that may ultimately be a good thing. We don’t think it or other trade agreements will go away, however. Globalization is firmly established, and cross-border M&A deals will remain alluring. Trump administration trade war saber-rattling may actually stimulate inbound foreign direct investment in the U.S., as companies in a broad size range seek to protect their access to the world’s largest economy. U.S.-based companies will continue to look for expansion opportunities abroad.
8. Repatriation opportunity. This could be the year that significant amounts of cash held by U.S. corporations overseas is repatriated. As estimated $3 trillion in cash from U.S. businesses was parked overseas last year. Now, with President Trump’s tax reform, U.S. corporations will get a tax break on income stashed abroad, which might encourage them to bring it back to the U.S. The one-time deemed repatriation tax is lower than what they would have paid under the old tax structure.
Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy infrastructure and human capital management.