2016 was an exciting year in American politics. The upset victory of Donald Trump over Hillary Clinton on November 7th led to speculation in the equity market that resulted in a 500 point S&P boost culminating on Inauguration Day, the 5th largest increase following the outcome of a presidential election since 1929. Investors are clearly excited about the outlook of the economy under Trump and anxious to see what his first 100 days in office looks like. His campaign platform consists of a tax plan to boost U.S. GDP $2 trillion in 10 years, a wall on the United States and Mexico border, and an plan to curb immigration. He carried out his controversial promise to enact an executive order preventing travel of individuals from nine Middle Eastern countries in the first week of office, signaling aggressiveness to make good on his commitments on the campaign trail. While the social policies received the most attention in late January, the White House’s tax plans have the potential to enhance the nation’s business activity, specifically in M&A. While the administration’s projected outcome for the two-part tax plan is to return US business from overseas and create jobs, analysts predict it carries additional incentives for CEOs and investors.
The first part of the Trump tax plan intends to bring companies’ $2.5 trillion overseas profits back to the United States, have them reinvest their cash in U.S. business, and boost economic output. The President plans to achieve this stimulus through a repatriation tax holiday. A major objection of companies with overseas operations to reinvesting their foreign profits in the US is the 35% repatriation tax the country charges on companies that transfer foreign currency to domestic dollars. Trump proposes a one-time repatriation tax cut to 10% to businesses that bring cash state-side. The intended result of this policy is companies with large foreign operations, such as Burger King, reinvest their savings in U.S. job creating initiatives. However, CEO of Blackrock, Larry Fink, and VP of Transfer Pricing at Reuters, Sam Cicogna disagree the policy aligns the interests of corporations with the labor market. Both Fink and Cicogna believe the tax cut incentivize similar actions to the 2004 repatriation tax holiday: stock buy-backs by companies – where businesses purchase their own stock forecasting it will increase in value, and M&A, since international companies will have significantly more savings than small corporations and the capital to purchase more assets for growth strategies. This is good news for owners who look to exit in the coming 4 years, as abundant corporate capital means a higher willingness to pay for a business.
Additionally, the Trump tax plan calls for a decrease in the corporate income tax from 35% – one of three highest marginal tax rates in the world – to 15%, to turn the U.S. into the most competitive business haven in North America and throughout most of the world. Similarly, this initiative leaves more cash on companies’ balance sheets from the lower middle market to large cap companies to make purchases in 2018. Combine these savings with indications from the President to overhaul regulatory policy and it signals strong potential for deal making activity, the likes of which could surpass $4.7 trillion 2015 M&A levels. With any luck, these predictions are more accurate than those leading up to the election and create an equally exciting 2017 and 2018 for business.
Research Analyst with The Hatteras Group