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Tax reform for private companies

Is now the time to sell?

​The passage of US tax reform legislation, formally referred to as "An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018," (the "Act"), may benefit US private organizations more than just possibly reducing their US tax liability. The competitive landscape has shifted now that the new law has significantly reduced the US corporate tax rate, along with other related provisions that could spur additional M&A interest.

A global tax shake-up

On December 22, 2017, President Trump signed into law a US tax reform package that significantly lowered tax rates on corporations, pass-through entities, individuals, and estates. The Act replaced the country's graduated corporate rate structure, and its 35 percent average overall rate, with a flat 21 percent rate.

Overnight, the law transformed the United States from the highest corporate-tax jurisdiction among the 35 developed nations in the Organisation for Economic Co-operation and Development (OECD) to the 13th highest.1 After adding in corporate income taxes levied by individual states, US corporations will now pay an average of about 25.75 percent, compared to 38.91 percent before the Act (see chart).

Highest corporate income tax rates of developed countries

Note: New US corporate tax rate reflects 21% federal rate, plus 4.75% effective state tax rate, for a total of 25.75%.

More cross-border deals

Global deal-making has already jumped in the first three weeks of the year, though the talks leading to those transactions likely predated the new law's passage. Deals closed during that period totaled $207 billion, the highest amount since the same period of January 2000, according to Dealogic.2

Even before the tax law was passed, US-domiciled companies were receiving increased attention from global buyers looking to tap into a strong and steady economy. Global buyers may face even greater competition going forward, as they also will have to contend with US multinational companies that are now bringing cash home that was historically pooled in overseas companies. The one-time repatriation of overseas cash permitted by the Act is going to give such organizations more spending fuel, and strategic acquisitions inside US borders could soon follow.

Private companies, in particular, may be primed to benefit from foreign buyers' increased appetites. That's because more merger competition has led them to set their sights on smaller targets. In 2016, a few mega deals led to a surge in the deal value of US-purchased companies. But, in the main, deal values on inbound transactions have declined in recent years even as volumes have risen.3 That trend is working in favor of US private companies, particularly those who have a smaller deal price compared to the mega deals.

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Preparing for a nibble

For US private company leaders, now is an opportune time to strengthen their own corporate development capabilities so they are prepared to field and evaluate an increased interest in their businesses. With the passage of the Act, every private company should reassess what it is worth—in whole or in part. They should also make sure that their business is "M&A ready"—in possession of a clear strategy, an optimal corporate and tax structure, and best-in-class reporting and governance.

It also makes sense to actively assess the competitive M&A landscape, taking note of who's buying, who's selling, and the prices they're realizing. Different industries and geographies will see varying levels of interest. As such, it's important to partner with M&A specialists who understand your specific sector dynamics and can provide access to potential buyers who may not have historically been interested in owning US assets.

End notes

1 Organisation for Economic Co-operation and Development, Table II.1. 2017 Statutory corporate income tax rate, https://stats.oecd.org/index.aspx?DataSetCode=Table_II1#.
2 Ezequiel Minaya and Nina Trentmann, "Large Deals Set Record Pace in January," Wall Street Journal, Jan. 24, 2018, https://www.wsj.com/articles/large-deals-set-record-pace-in-january-1516795599.
3 "Mergers and acquisitions 2013–2017," Thomson One Banker database, accessed January 22, 2018.

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