Comprehensive tax reform enacted in the United States on December 22, 2017 should significantly impact mergers and acquisitions activity going forward.
The lowered corporate tax rate should positively affect M&A activity by enhancing the after-tax return from transaction synergies. In addition, there should be significantly more cash available for acquisitions of U.S. companies and assets due to the mandatory deemed repatriation of offshore earnings and profits, combined with the 100% dividends received deduction from a U.S. corporation’s foreign subsidiaries.
The new limitation on interest deductibility to 30% of adjusted taxable income could have a significant impact on leveraged buyouts and other debt-intensive deals (especially those in private equity). The use of alternatives to debt, e.g., preferred equity, may become more frequent. The use of preferred partnership interests in Up-C structures may also become more prevalent. Likewise, corporations that may be affected by the interest deductibility limitation would be motivated to structure certain acquisitions as leases, swaps, derivatives, etc., rather than as debt, to avoid interest deductions that exceed 30% of taxable income.
Details on these and other considerations are available in S&C’s client memo.