Much has been written about the impact of the recently passed U.S. tax reform legislation on U.S. companies and how they may utilize the additional cash on their balance sheets. One potential effect from the law’s passage could be increased merger and acquisition activity, which might benefit private companies.
The tax legislation that President Trump signed into law significantly lowered tax rates on corporations as well as owners of some pass-through entities. Notably, the new Tax Code replaced the country’s graduated corporate rate structure, and its 35 percent top tax rate, with a flat 21 percent rate.
Lower taxes can be a deciding factor in merger considerations, and U.S.-domiciled companies were already receiving increased attention from global buyers because of the steady United States economy. Between 2008 and 2012, foreign buyers closed an average of 1,333 purchases of U.S. companies per year; that number grew to an average of 1,778 deals per year between 2013 and 2017, according to a recent report released by Deloitte.
These global buyers may face stiff competition in the M&A market, as they will have to contend not just with other foreign rivals, but also with U.S. multinational corporations that are now bringing cash home as a result of the new law’s one-time repatriation of previously deferred overseas profits. In addition, private equity funds continue to have plenty of capital to deploy on acquisitions.
All of this interest from overseas could be lucrative for privately owned companies as foreign buyers are increasingly focused on smaller transactions. Deal values on inbound transactions have been falling in recent years even as deal volumes have risen, in part because of the rapid escalation in the stock prices of larger, publicly owned companies.
A recent Deloitte survey of nearly 1,900 global private companies supports the idea that cross-border merger activity is poised to rise in the months ahead. More than four out of every 10 executives polled said they expect their company to make an acquisition this year. The top two reasons they cited were the opportunity to enter new global markets, and expanding and diversifying their customer base.
The Deloitte survey was taken before the new law was enacted last year. Its passage is likely adding pressure on companies that were already asking tough questions about their path to growth in the global economy. Boundaries between markets are increasingly blurring, and those that have not considered M&A in the past may be more likely to now as part of their growth strategy.
What does all this mean for the owners and executives of private companies in the U.S.? Now is the time for companies to prepare for potential buyers. Private company leaders need to be ready to field and evaluate potential offers for their business, from both home and abroad. Given this unique confluence of demand, it is important for business owners to understand what their business may be worth and to start evaluating the potential after-tax cash generated from a sale. They also need to make sure their business is “M&A-ready” -- in possession of a clear strategy, an optimally organized business and tax structure, and best-in-class reporting and governance.
In short, the conditions are coming together for what could be a great M&A season for U.S. private companies. Whether or not a company and its owners are actively considering a sale at this time, thoughtful preparation will be the cornerstone to a successful transaction.