As you all know, our January 2018 webinar covered all that’s happening in the world of mergers and acquisitions with a particular focus on the USA.
We want to once again thank Chris W. Blees of BiggsKofford for taking the time to answer our questions and the Alliance of Merger and Acquisition Advisors for helping us organize this highly successful event.
In case you missed the live event, please feel free to check out the full transcript here.
DOWNLOAD M&A TRANSCRIPT
Also, if you have any follow-up questions for Chris, make sure to submit them in the pertinent forum linked to below.
SUBMIT FOLLOW-UP M&A QUESTIONS
Here are a few of the event’s main highlights!
Are companies currently looking to purchase others or are they holding onto their money? What's the status in the market at this stage?
“I think the M&A markets are certainly hot right now. From all the measures that I look at and all the statistics that are being tracked, companies are trying to be acquisitive. They're trying to acquire. It's a typical function of the market. The stock market, generally, rewards growth and corporations have a difficult time growing organically. And so, especially when the market continues to rise, that thirst for growth expands even more and you see companies that are driven to acquisition.”
The number of deals in the M&A sector has plateaued. Why aren't more sellers taking advantage of the current markets?
“What we are seeing today is…that multiples are climbing like you would expect in a hot economy and so…you see corporations and private equity intending to be more acquisitive and do more deals…yet by most of the measures that I've seen the actual volume of activity is plateauing.”
“So I have a couple of theories behind this, but no serious evidence as to why there are not more transactions taking place when there is certainly a desire and the capital to do them.”
“I think a lot of the good midsized companies have been acquired or at least have already taken private equity capital. Compare this to, for example, about 10 to 15 years ago. The numbers of companies that had already taken private equity capital, they were sort of untapped middle market-sized companies in the U.S. in particular but even throughout the developed world. What has happened is, over that last decade, we've seen that private equity has been very effective. They've been out chasing these deals and they have in large part bought up the market.”
“I think from a sellers' perspective, many sellers are saying: Why would I sell today? Where am I going to put [money] so that most investors would feel safe? If you go back to 2015, prime rates were 7% or 8% so a seller could take their proceeds from the sale and reinvest that, even if they were making prime rate loans, for example, they could be making 7% to 8% on their money. Today, that same investor is going to make 4% if they're lucky and so I think the investment options for sellers is making them question, ‘If I make half of the same money on my investments, what am I going to do?’ So, I'm better off keeping my company. I know it's a nice steady rate of return.”
What are some of the main tax-related issues companies must take into account when involved in mergers and acquisitions?
“You can really boil it down to whether you're on the buy side or the sell side of the equation…If you're selling and, in particular, a private company, middle market sale, whether that's being sold to a larger public company or sold to a private equity firm, the seller's general motivation is how to maximize their after-tax proceeds and the most common issue that's encountered is capital gain versus ordinary income.”
“On the buy side, it's traditionally been the goal of creating tax benefits and assets that can be amortized or depreciated going forward into future years and helping offset their profits and therefore enhance their rate of return. So it's not a complete give and take but, in most cases, what we see is the goals of the seller to have maximized their capital gain are offset by the goals of the buyer to be able to maximize their depreciation of what they've acquired.”
How will Trump’s latest tax reform affect M&A in the US?
“I think the biggest impact is related to the 21% corporate rate… What's interesting is what it has done from the buyers' perspective is that, potentially or at least in some fashion, it has reduced the buyers' desire for assets. We are back to this general buy-side scenario, which is to maximize their depreciation and amortization benefits. And those still exist, except they're just less valuable. So instead of providing a 35% deduction and saving $0.35 on the dollar for taxes, it's now only $0.21.”
“On the flip side, what this 21% rate reduction has done is that it has significantly changed the lexicon for determining: Is an asset deal of a C corporation now more palatable for a seller than a stock transaction? Traditionally, going into an acquisition or sales scenario for a C corporation client, the common logic has always been we need to figure out how to get this done with a stock deal because the asset deal is going to be very painful. Well, it's now still more painful than a stock transaction, but it's less painful.”
There was plenty of more information shared so make sure to check out the transcript in its entirety!