U.S. Tax Reform Spurs Higher Activity For Internal M&A Market

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By Ben Stupples

U.S. companies are looking to spend more on internal deals after the rewrite of the country’s tax laws, rebutting global trends in a sign the reform is stimulating the American economy.

The average size of proposed, pending, or withdrawn internal merger and acquisition (M&A) deals for North American businesses increased by 9 percent during the first three months of 2018 in comparison to the same period a year before, according to data compiled by Bloomberg Tax.

Globally, the average size of deals fell 2 percent. U.S. companies made up more than 80 percent of North America’s M&A activity in the first quarters of 2017 and 2018, according to the data.

Signed by President Donald Trump Dec. 22, the 2017 U.S. tax act ( Pub. L. No. 115-97) aims to bolster the U.S. economy, slashing the corporate tax rate to 21 percent. In addition, it allows the country’s multinational businesses to repatriate the cash and assets they stashed overseas to avoid the previously high federal corporate rate of 35 percent. In February, the United Nations said in a special report that the new U.S. law may lead to the repatriation of as much as $2 trillion.

Fundamentally, the new laws “encourage U.S. companies to invest in the U.S.,” Marc Middleton, a senior adviser in transaction advisory services at EY, told Bloomberg Tax May 3. “In turn, that is going to have a negative effect on U.S. companies interest” for investing overseas.

Billion-Dollar Bids

The average size of the 2,742 proposed, pending or withdrawn internal M&A deals across North America in the first quarter of 2018 was $726 million, according to Bloomberg data. The total number of deals is in line with the same period during 2017, beating a global drop of 4 percent.

Two of the quarter’s largest deals include insurer Cigna Corp.’s $67 billion takeover bid for Express Scripts Holding Co., the pharmacy-benefits manager, and coffeemaker Keurig Green Mountain’s $18.7 billion merger with soft drinks business Dr Pepper Snapple Group Inc.

At the same time, some of America’s largest companies have disclosed how they benefit from the new U.S. laws. In a Jan. 24 earnings call, Comcast Corp.’s Chief Financial Officer Michael Cavanagh said the telecommunications business had shared $171 million among employees as a special bonus.

In the same month, Apple Inc. said it will invest more than $30 billion in the U.S. over the next five years.

“Recent corporate tax reform enables us to deploy our global cash more efficiently,” Tim Cook, Apple’s chief executive officer, said in a May 1 earnings call on the iPhone-maker’s latest results.

Supply and Demand

While American companies’ access to overseas cash is expected to increase demand for M&A, the lower U.S. tax rate for businesses may equally provide a new form of supply in this market.

In an online post on U.S. tax reform’s impact on M&A activity, investment bank Baird predicted that local businesses should be more willing to divest and sell off assets under the new tax system.

“Here, tax is providing the opportunity for mergers and acquisitions on both the demand and supply side for companies,” David Blois, managing partner at London-based business M&A Advisory, told Bloomberg Tax May 3. “But the actual decision-making for M&A is never purely driven by tax.”

“U.S. tax reform is going to have a significant stimulus effect,” Craig Hillier, EY’s head of international tax services, told Bloomberg Tax May 3. “Even if companies return a lot of their cash to shareholders, which many will, their shareholders and other investors will do something with it.”

To contact the reporter on this story: Ben Stupples in London at bstupples@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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