Jefferies

Actionable Ideas for Companies and Sponsors

2017 Tax Reform Will Favorably Impact M&A Activity Levels

The Tax Cut and Jobs Act of 2017 will have a significant favorable impact on M&A deal activity. Specifically, the resulting increase in U.S. profits, coupled with the “deemed repatriation” of profits back to the U.S., should create additional dry powder for investments, including acquisitions. And with more money available for deals, acquisition multiples could expand further in the near-term. In addition, there is an expectation that tax reform will lead to increased economic growth, which should lead to enhanced confidence in the executive suite and corporate boards further strengthening M&A activity.

The reduction in the corporate rate to 21% should increase after-tax cash flow, resulting in higher cash balances, driving up company values and the prices acquirors should be willing to pay in an M&A transaction. While there will be offsets to the lower rate, including limiting deductibility of interest expense, other factors, such as the immediate expensing of certain qualified property, will accelerate tax benefits on capital investments (albeit at a lower tax rate), further adding to cash balances. In addition, other elements affecting taxes, including the movement from a worldwide system of taxation towards a territorial system, the addition of an excise tax on payments to foreign affiliates and the proposed tax on “foreign high returns“ are expected to incentivize the on-shoring of overseas profits.