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Nov. 1, 2020, 6:51 a.m. EST

Prospect of Biden winning could spur deal-making rush ahead of tax hikes

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By Lina Saigol, Paul Clarke

A Biden administration could trigger a new round of deal making, as executives rush to close mergers and acquisitions ahead of corporate tax hikes, if power in the White House shifts to the Democrats.

If Democratic candidate Joe Biden beats President Donald Trump on Nov. 3, he could disrupt the plans companies have made around the 21% corporate income-tax rate, by increasing it to 28%, which would drag on companies’ revenues, leaving them with less firepower to do deals. 

Opinion:  Biden’s corporate tax hike: What will it mean for the Dow?

In the short term, the prospects of these changes could “serve as potential catalysts for taxpayers to close M&A deals this year,” said law firm Skadden of the tax changes, in an Oct. 22 note. 

Biden has been ahead in the latest polls — leading by as many as 9 percentage points over Trump.

Global deal making already reached a record $1 trillion in the third quarter, as confidence returned to boardrooms after a lull at the height of the pandemic in March. That number could surge further by the end of the year.

“There’s a real skittishness about the U.S. election, which is fueling some of the big M&A transactions coming to market currently,” said the head of investment banking at one large U.S. bank.

Read: Wall Street banks net $64 billion in fees in bumper year for M&A and IPOs

Private equity groups could also try to cash in on their investments ahead of any tax changes, which would add even more dry powder — or uninvested capital — to the $2.6 trillion they have amassed, according to data provider Preqin.

Todd Albright, chief revenue officer for software services provider and data firm Datasite, added the change in tax and trade policy under a new administration may represent an opportunity for some, especially private equity, to make investments now before potential tax or other policy changes take place. 

“A change in administration may also mean more use of taxes versus retaliatory tariffs as a cross-border business lever,” Albright said.

Read: Private Equity Sees Regulatory Reforms Hinging on November Elections

Concerns about changes in corporate tax during a Biden administration are top of the agenda in C-Suites, with 62% of business leaders citing it as a key concern in a recent PwC survey .

As well as the corporate tax increase, Biden has proposed raising long-term capital-gains tax to 39.6% for the highest earners, compared with Trump’s plans to keep it at 20%. This would include carried interest payments for private-equity executives. This is a portion of future profits that is taxed at lower rates and forms the bulk of their compensation.

Read: Biden’s no radical, but that doesn’t mean he will be private equity’s friend

“The likelihood that U.S. capital-gains tax rates will be raised in 2021 will certainly spur some sellers to close deals by the end of 2020. This will clearly have a greater impact on private company deals,” said Frank Aquila, global head of M&A at international law firm Sullivan & Cromwell.

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