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US tax changes could drive up M&A valuations

Plastics News, January 12, 2018

File photo Bill Ridenour, president of Polymer Transactions Inc., says changes to the U.S. tax structure could drive up prices in mergers and acquisitions.

Recent tax cuts passed in the U.S. could have an upward impact on the mergers and acquisitions field.


The changes lower the corporate tax rate from 35 percent to 21 percent and also lower tax rates for some businesses classified as S corporations or LLCs, commonly known as “pass-throughs.”

The impact of these changes, according to financial pros interviewed by Plastics News, could be more funds available to invest and, as a result, higher prices paid for acquisitions.

The tax bill “will likely further increase M&A prices,” said Bill Ridenour, president of Polymer Transactions Inc. in Foxfire, N.C. He added that this likelihood is the result of the repatriation of foreign profits held overseas by U.S. companies, the reduction of tax rates to both public and private companies and the oversold condition of the marketplace.

The lower corporate tax rate “will immediately provide additional cash to reinvest in internal and external expansions such as M&As,” according to Ridenour.

“The net effect of the corporate tax reductions is a reduction to the tax factor used for valuing companies by seasoned business buyers,” he added. “Any relief in taxes for the target company will result in increased after-tax cash flows available to the buyer.

“This will inevitably result in higher business valuations, especially from public companies who will use their own reduced tax rate … as their new basis for valuation.”

As a result of these tax changes and “a growing scarcity of quality sellers,” Ridenour expects multiples paid for plastics firms to increase another 10 to 15 percent above their current levels, which already are at historic highs.

Other financial pros said that although the tax changes could impact the financial picture, they might not affect the decision-making process itself.

“Anything that reduces the transaction cost could drive up multiples,” said Phil Karig, managing director at Mathelin Bay Associates LLC in St. Louis. “But most family-run businesses aren’t going to sell because of tax changes. Owners and family goals are what drives those things.”

“I don’t think the tax changes will have a major impact on M&A,” added John Hart, managing director of P&P Corporate Finance LLC of Southfield, Mich. “It could spur a lot more investment and growth for small and midsized companies, but it might not be a huge driver in the decision to sell.”

Plastics business owners also might be affected by another change that will allow manufacturers to deduct the full cost of investing in new machinery immediately instead of spreading it over several years. This change could convince some owners to hang on for a few more years rather than cashing out, some financial experts said.

“There’s a lot of uncertainty,” said Terry Minnick, chairman of Molding Business Services in Florence, Mass. “The treatment of pass throughs will change, and there will be more funds left over with the drop in the corporate rate — but it also makes owning a small enterprise more attractive. You could buy new machines and possibly increase the value of your firm.”

Lower estate taxes also could encourage owners to cash out, according to Thomas Blaige, CEO and chairman of Blaige & Co. in Chicago. But he added that most M&A deals “are marketdriven.”

“The No. 1 strategy to make your firm more attractive is still cost-cutting,” Blaige said.

The most extreme example of tax impact came from Rick Weil, managing director with Mesirow Financial in Chicago. Weil said that three or four of his firm’s clients have asked that deals be delayed into 2018 to create more savings for themselves and to drive up the value of their firms.

“If an owner is on the fence about selling, the tax changes potentially might tip the scales [toward selling] by improving his cash flow and improving his company’s performance,” said David Evatz, a managing director with Stout Risius Ross LLC in Chicago.

Category: Plastics News