Tax Reform, Trade Barriers--How M&A Activities Will be Impacted

How does the new tax law affect cross-border merger and acquisition (M&A) deals? Are the effects positive or negative? Are companies still in the game for making M&A deals in the current trade environment?

To find out the answers, Bloomberg Tax recently interviewed PwC’s U.S. acquisitions partner Curt Moldenhauer.

Tax Law Impact

Although companies are still in the early stage of digesting the impact of the Tax Cuts and Jobs Act, Moldenhauer pointed out a few impacts the new tax law will have on M&A activity. He believes that we should expect to see more M&A activity this year and next “because the decline of the corporate tax rate, which will make the U.S. a better environment for business.”

The lower corporate income tax rate will attract more companies to the U.S. That will increase both outbound and inbound M&A activity.  

Another big change under the new tax law that people are buzzing about is the cash repatriation tax (IRC 965). However, Moldenhauer said that it won’t really affect M&A activity. “There is huge amount of cash, trillions of dollars, available for deal-making,” he explained, “repatriation might bring a few billion back. Therefore, there won’t be a big impact.”

The new tax law also features a provision that allows companies to quickly write off investments in new plants and equipment (IRC 168(k)). Companies are allowed to write off those business investment over 5 years. But, it won’t directly affect M&A deals, according to Moldenhauer. “But it will affect companies’ post-M&A tax planning,” he added.

Re-Evaluating Valuation Model

Even though the impact is “too early to tell,” it is time to reconsider your tax structure and valuation model. “For example,” Moldenhauer said, “the deal valuation model they [some advisory firms] run for their clients haven’t even considered the new tax rates. They are still using the old tax rate in their model. It is very important to go back and look at the initial deal model.”

In terms of the new revenue recognition rules, issued by the Financial Accounting Standards Board and the International Accounting Standards Board, Moldenhauer said that because the revenue rules have been around for a while, people are already familiar with them and have already factored into their M&A valuation models.  

Keeping Up with ‘Breaking News’

When you are getting at least ten “breaking news” alerts on international trade everyday, Moldenhauer said it is important to think about what could possibly impact the M&A valuation model.

“For example, in the current deal environment, companies dealing with aluminium product need to look at the cost structure [of acquirees] and decide, at what point, it won’t make any sense for an M&A deal anymore because of the tariffs imposed. And, at what point, an alliance, or a joint venture would make more sense. They need to think about different alternatives.”

Another event affecting M&A deals is the merger between AT&T and Time Warner. It is “the first time in 20 years, that the DOJ has evaluated a vertical type of deal,” Moldenhauer said, “[and, as a result] we might see a lot more vertical deals go through, such as deals between healthcare companies and pharmacies.”

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