Breaking Down the Tax Cuts and Jobs Act: The Challenges for M&A

Congress recently passed the Tax Cuts and Jobs Act which had many people wondering what will this mean for the industry. Overall, William Blair believes a lot of positives will come out of this, but that doesn’t mean we won’t face some hurdles.

From 2018 through 2021, company’s deductions for interest income are limited to 30% of EBITDA and after that point the limit becomes more restrictive, applying to 30% of EBIT. The limited is expected to have an impact on financial sponsors’ after-tax cost of capital in high-leverage and high-multiple transactions. We could see this factoring buyers decisions on financing structures.

The value of any net operating losses (NOLs) has typically been a factor in the price a buyer is willing to pay. Now, with NOLs deductions being limited, they will become less valuable to buyers, and going forward, buyers and sellers will have to put more thought into the value of NOLs.

Lastly, the minimum holding period for carried interest has been increased from one year to three years. Typically, financial sponsors hold onto portfolio companies for more than three years but in sectors such as healthcare and technology, a period of fewer than three years is seen more frequently. It will be interesting to see how this will affect financial sponsors decision on when to sell a company.

Despite a few challenges, we at William Blair believe overall the tax reform will have a positive effect on M&A. See the last post breaking down the opportunities for the industry.

Breaking Down the Tax Cuts and Jobs Act: The Opportunities for M&A

The U.S. Congress passed the Tax Cuts and Jobs Act in mid-December, 2017. As people try to figure out what this means, William Blair believes the overall impact will be positive. The reduction in corporate tax and a lower tax rate for repatriated foreign income are two exciting aspects of the tax reform that will impact dealmaking.

The corporate tax rate has been reduced from 35% to 21% and the corporate alternative minimum, that ensures corporations pay at least some tax on their income, was eliminated. With lower rates, companies are expected to have higher cash flows and higher equity valuations. This means we can expect to see more companies will have capital to use through acquisitions.

Also, the United States is moving to a territorial system and implementing a reduced tax on repatriated income. This means only income earned domestically is subject to U.S. taxes along with a reduced, one-time tax rate on foreign profits that companies have already accumulated overseas. U.S. companies will no longer have incentive to keep profits overseas and it is expected to have a meaningful positive impact on M&A activity. An example of this is in January of 2018, Apple announced that it will pay a one time tax of $38 billion on repatriated income (a return of $250 billion in capital to the U.S.) and it will also be making domestic investments in new offices and advanced manufacturing in the U.S.

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Congratulations to Chicago Booth School of Business Alum John Salvino

John Salvino, a financial advisor that is part of the William Blair team’s Private Client Advisors Group, was named to the 2018 Top 40 Advisors Under 40 list by On Wall Street magazine. Impressively, this is John’s second time making the list, and he was also honored in 2016.

John Salvino studied at the University of Notre Dame where he earned his bachelor’s degree cum laude. His MBA in finance was later earned from the University of Chicago Booth School of Business. William Blair boasts a few Chicago Booth School of Business Alumni including Mark Brady, William Blair’s Global Head of M&A. Brady, similar to Salvino, has been greatly influenced in his professional career by his time spent at Booth.

I attended the Chicago Booth School of Business School from 1989-1991. In my time at Booth, I made a number of very impactful relationships. Now, working in M&A, I have realized the importance and real-life impact of many of those relationships. After obtaining my MBA in Finance and Business, I started my professional career at William Blair. I’ve since found that my experiences at Booth have shaped my professional path that lead me to my current position with William Blair. The concepts and ability to engage in thoughtful teamwork that I learned at Booth are things I actively use today with my clients and my own team,” said Mark Brady as he reflected on the impact of his Booth education on his success with the William Blair team.

For the William Blair team, John works with individuals, families, trusts, small businesses and foundations to form personalized portfolios appropriately managed within a client’s respective financial situation. John has been with the William Blair team since 2002. Wearing several professional hats, John is a member of the Salvino Wealth Management Team and serves as a chairman of the University of Chicago Booth Alumni Finance Roundtable.