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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

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.

Under both former President Barack Obama and Trump, private-equity executives have been given tax breaks on carried interest payments. “A more draconian approach can suppress deal activity,” said Cornelia Andersson, head of M&A and capital raising at Refinitiv.

“We’ve seen particular examples of this in the financial sponsor and PE-backed market where proposed taxation reforms affecting certain types of financing or carried interest may slow PE-backed acquisitions or even hawkish fiscal policy,” Andersson added.

Overall, Trump has been supportive of business. In 2017, Congress passed a Republican-backed tax law that helped companies build up acquisition war chests by removing obstacles to repatriating their overseas profits back to the U.S. According to the commerce department, companies booked $776.51 billion in profits made overseas in 2018.

Read: Trump raised 5 times as much money from America’s top CEOs as Biden

His first term in office has coincided with a rush in M&A activity — with the value of deals up by 62% compared with the number during the same period for Obama’s Democrat administration, according to Refinitiv. 

“President Trump is viewed as being pro-business, although his administration has blocked or attempted to block several deals, citing antitrust reasons or national security concerns,” said Alan Wink, managing director of capital markets at tax consultant EisnerAmper. 

Since Trump took office, there have been over 500 withdrawn deals, or around 16% of the total, compared with 11% under Obama’s first term. In 2017, AT&T (NYS:T) ’s $85 billion merger with Time Warner prompted Trump to claim the deal would place “too much concentration of power in the hands of too few.” His Justice Department filed a lawsuit to block the deal, but the two companies were eventually given the go-ahead to complete their merger. 

One year later, Singapore-based microchip maker Broadcom (NAS:AVGO) withdrew its $117 billion bid to acquire Qualcomm (NAS:QCOM) after Trump blocked the attempted takeover, citing national security concerns. 

Refinitiv’s Andersson cited President Trump’s 2017 executive order banning Chinese investment firm Canyon Bridge Capital Partners’ planned $1.3 billion acquisition of Lattice Semiconductor (NAS:LSCC) , which sent a signal to Beijing that Washington will oppose takeover deals that involve technologies with potential military applications.

“In recent years, we’ve seen an increase in the scrutinization of cross-border technology, infrastructure and data deals, specifically,” she said.

Trump has ramped up the rhetoric against China in recent months, offering tax credits for American companies that relocate manufacturing facilities to the U.S. from China and encourage more investment at home.

Biden is seen by many in the industry to be more open to cross-border acquisitions, allowing U.S. companies to freely expand abroad.

“Non-U.S. buyers will be more likely to seek U.S. acquisition targets and U.S. companies will be more comfortable making acquisitions abroad without fear of a stinging tweet from the White House,” Aquila said.

Link to MarketWatch's Slice.