What Effect Has the Tax Cuts and Jobs Act had on M&A in 2018

At the end of 2017, Congress passed what many call the most significant change to the US Tax Code in more than 30 years: the Tax Cuts and Jobs Act. This altering of the U.S. Tax Code creates an incredibly different landscape for M&A in 2018. Many of these changes are increasing cash flow, and companies are spending their newfound capital on business acquisitions. Here are three reasons why companies have more capital and CEOs are incentivized to acquire add-on businesses in 2018:

1. The corporate tax rate decreased from 35% to 21%. The most anticipated and noteworthy change, this tax cut loads companies with more capital. Almost halfway through the first year of this change, corporations are deploying this capital in various ways, from creating newly-incentivized employee compensation plans to purchasing additional equipment, buildings and other businesses.

2. Companies can repatriate money for an incredibly low rate. Corporations holding money overseas can repatriate their funds at a much lower rate (15.5%) as compared with the old rate of 35%. With over two trillion dollars held overseas, as companies take advantage of this discounted rate and repatriate funds, more cash is available to acquire companies – with more potential buyers, this drives higher multiples and increased deal flow.

3. Bonus deductions create benefits to buy. Under the new law, qualified assets (any tangible property with a depreciable life of less than 20 years like land, equipment and buildings) purchased after September 27, 2017 through the end of 2022 qualify for an immediate bonus deduction at the asset’s full cost. Since this includes acquired businesses, companies can reduce their tax burden by using excess capital to invest in middle market companies.

With these changes to the Tax Code, M&A professionals believe 2018 could be a record year for valuation and activity. PwC reports that 2018 Q1 deal value in the U.S. is up almost 50% from Q1 2017. Thompson Reuters reports global M&A activity up 67% YOY in the first quarter. While deal volume has slipped a bit as compared with 2017 Q1 numbers (10-12% decline), it is evident that there is more cash in the market from these tax cuts and that companies are spending it on acquisitions.