What the Fiscal Cliff Means for M&A Deals
In the afterhours of the new year, government officials averted the long-anticipated fiscal cliff that would have sent the U.S. economy into another deep recession. Despite the aversion, frustration and concern among Americans has been very apparent in the past few months. In the last week of December, markets were down as shareholders looked for more conservative vehicles to put their money into. However, in the first week of the new year, stock exchanges across the board experienced a spike that reflected optimism about the economy. But how positive will Americans stay as the kinks continue to get worked out?
The combination of tax increases on wealthy Americans and spending cuts that will occur in the coming months is causing investors to rethink their financial strategies in order to achieve stable, tax-deferred, long-term growth. In addition to the stock market, the market for mergers and acquisitions remains unpredictable. Private equity investors and owners of closely held companies had been cautiously watching out for the fiscal cliff; it will be interesting to see how they play their cards going forth into the future.
The anticipation of increases in both capital gains and dividend tax rates after the expiration of the Bush Tax Cuts caused dealmakers to scramble in order to close merger and acquisition deals before the new year. The large capital gains that result from the sale of a company are going to be more heavily taxed in 2013 than they would have if deals were concluded before the end of 2012. For filers earning more than $400,000 the capital gains and dividend tax rates increased from 15% to 20%. This means that the backers of M&A deals will have to pay more in taxes.
At the end of 2012, the fear of the economic implications companies would face after falling from the cliff caused companies and private equity investors to attempt to close deals, fast. As a testimonial to the increase in the number of deals at the end of 2012, middle-market M&A investment firm, Monroe Capital noticed a heightened influx of deals in the past month and a half. Though it is common for more deals to come to fruition at the end of the year, 2012, investors say, was hotter than expected. Regardless, the global M&A market is down nearly 22% in total transaction value from the first half of 2011.
Now that the cliff has been averted, temporarily, optimism will continue to resonate with investors in the short term. But for M&A dealmakers, long term implications are important to consider as well. With uncertainty increasing over the fate of the debt ceiling, the still growing deficit, and long term consumer optimism, we may continue to see shortfalls in the number of M&A deals despite the heightened deal action at the end of 2012 and the aversion of the cliff. Companies will continue to constrain capital spending due to economic uncertainty. As a result, we will probably see American companies making less large investments, at least for the foreseeable future. Heads may turn to more foreign investment opportunities in order to avoid tax implications and benefit from growing economies like China and countries in the Middle East. It will be interesting to see how a potentially lower amount of M&A deals will affect banks and the economy as a whole. As government continues to sort out issues and short term consumer outlook stays positive, it is important to be wary of the long term health of the U.S. and be conservative about large M&A opportunities.
by Ryan Erfer – ryan(at)mergers.com