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Will US Tax Reforms Trigger an M&A Spending Spree?

The recently announced “tax repatriation holiday” could have a favorable impact on M&A activity in 2018. This new tax plan will permit companies to transfer (repatriate) cash back to the US under a much lower tax rate. Prior to these changes, many companies have seen a large proportion of their cash reserves effectively locked-up overseas.

How Much Cash Is Locked-up Overseas?

The aggregate of US cash locked-up overseas is vast - studies suggest it might total in excess of $2.5 trillion (Business Insider). Of this, S&P 500 Companies hold around $920bn – with estimates suggesting around $250bn could be repatriated.

Apple, Google and Microsoft are famous for hoarding cash overseas. Recent estimates put their overseas cash reserves at $250bn, $107bn and $139bn respectively (Bloomberg). Apple’s overseas cash reserves grow at around $3.6m per hour (The Wall Street Journal). For many companies, overseas cash reserves have been fueled by the proliferation of globalization. They have accumulated as a result of overseas sales (such as in relation to software in the case of Microsoft) and due to unfavorable tax rates creating a disincentive to bring cash home.

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What Exactly is Changing?  

For many years, some of the US’s largest companies with operations overseas have argued that their foreign profits should not be subject to the 35% corporate tax rate levied on profits generated domestically. Under the new tax plan, companies repatriating cash, stock and other liquid assets to the US, will face a “transition” tax bill of 15.5% (8% for cash invested in real estate and other tangible assets) compared to the previous rate of 35%. Looking at the numbers, if Microsoft, Google and Apple were to repatriate their total estimated overseas cash reserves, they would be facing tax bills of around $39bn, $17bn and $22bn respectively (compared to $87.5bn, $37bn and $49bn under the previous applicable rate of 35%). Not only is this a coup for companies previously subject to locked-up cash reserves – repatriation could act as a significant stimulus to the US economy in terms of tax revenue collected and a resultant multiplier effect.

How Might M&A Activity be Impacted?

It is anticipated that shareholders will be the main beneficiary of any large-scale cash repatriation – arising in the form of super-normal dividend payments or share buy-backs. Debt repayment could also be targeted – Apple, for instance, has around $97bn of debt. It is also conceivable that the tax repatriation holiday may fuel an M&A spending spree. The extent to which repatriation may fuel M&A depends on a company’s M&A strategy. It is unlikely that an abundance of cash will significantly alter the course of an established M&A strategy – for instance, other than the 2016 acquisition of LinkedIn for $26bn, Microsoft’s acquisitions have all been sub-$10bn. Google’s largest acquisition to date is Motorola (for $12.5bn in 2011) while Apple’s largest acquisition to date is the $3bn paid for Beats in 2014.

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These Silicon Valley Giants have never been short of cash and so cash being locked-up overseas is unlikely to have prevented any mega-deals from being pursued. Rather, these companies have shown a preference for a larger number of smaller, strategic acquisitions – so perhaps it is more likely that freed up cash will be deployed to support a greater number of riskier corporate venturing initiatives. Tech and pharma are arguably the sectors most likely to be impacted by repatriation-fueled acquisitions due to the amount of cash companies in these sectors typically have locked-up overseas. One possible outcome could be that cash-rich acquirers pay over-the-odds for a new breed of $1bn + unicorn.

That said, with the likes of Spotify and Airbnb rumored to be ripe for IPO is 2018 (valued at around $20bn and well in excess of $30bn respectively) there is a chance IPO plans could be shelved and that 2018 will see a mega-deal.   

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