A Biden win would heap taxes and scrutiny on M&A deals

By Crystal Tse and Nabila Ahmed on 10/30/2020

(Bloomberg) -- A Joe Biden victory on Nov. 3 would have a sweeping impact on mergers and acquisitions as he sets his sights on a higher corporate tax rate, new regulation and increased antitrust scrutiny.

The biggest loser might be private equity dealmakers. If firms don’t offload assets before the end of the year, they could have to pay almost double the current rate of capital gains tax on any profits -- a hit that may also dissuade founder-backed companies from pursuing a sale. But it could be a busy year for deals in the fossil-fuel industry, where companies are likely to continue consolidating and divesting assets that would have little opportunity to grow under a Biden administration.

“What sophisticated buyers are doing right now is examining acquisitions under various different political and tax outcomes,” said Jim Langston, an M&A partner at law firm Cleary Gottlieb Steen & Hamilton LLP.

Using Bloomberg’s Election Matrix, which assess the probability of individual policies becoming law under a Biden presidency, we looked at the top concerns for M&A practitioners and deal-hungry companies in the final run up to election day.

Corporate Tax Rate

Overall, companies paying a higher rate of corporate tax could have reduced cash flow for potential acquisitions. There’s a 90% chance that a Democrat-led Senate would bump the duty to 28% from 21% within the first year of a new administration, according to data compiled by Bloomberg. The likelihood drops to about 50% if Republicans maintain control of the Senate, the data show.

Private equity firms that have converted from publicly traded partnerships to C Corporations under the Trump administration -- including Blackstone Group Inc., KKR & Co. and Apollo Global Management Inc. -- would be among those paying the higher rate.

Capital Gains Tax

Biden is proposing to raise long-term capital gains tax rates and taxes on dividends to 39.6% on income above $1 million a year, from the current 20% (plus 3.8% in net investment income tax). If Democrats also sweep the Senate, there’s an 80% chance that would happen in the next one to two years, according to Bloomberg’s prediction model. Donald Trump has said he’s “very seriously” looking at slashing the rate further.

The change would hurt returns at private equity firms, whose fund profits are taxed as capital gains rather than regular income.

Some buyout firms are already rushing to offload certain assets before the end of the year to avoid the higher tax, dealmakers say. The levy could also hit founder-owned companies looking to sell, as well as the venture capital firms that back them.

“We as a group have seen dozens of transactions driven by that,” said Brian Richards, chair of law firm Paul Hastings’s global private equity practice. Richards said that some firms are even selling businesses they think would be worth more next year, because the potential increase in value wouldn’t be enough to offset the tax hit.

“They’ve chosen to sell now at what they believe is a discounted price because it results in better after-tax results,” he said.

Private equity started 2020 with more cash on hand than ever, according to data provider Preqin, and dry powder rose to nearly $1.5 trillion as of June 30.

Antitrust Scrutiny

Large-cap technology and health-care companies will face heightened scrutiny whoever ends up in the White House in January. But Democrats are considering several new laws that would make it even harder for them to operate under the radar. The legislation, much of it put forward by Minnesota senator Amy Klobuchar, would increase the number of deals that face regulatory challenges from the Justice Department or the Federal Trade Commission. It could also lower the bar for complaints against monopolies, and take a closer look at companies that scoop up assets in the wake of a transaction.

“While concern over the power and conduct of internet giants is bipartisan, it’s possible that a Democratic-led FTC would reduce any possibilities of settlements if the commission determines that wrongdoing has occurred,” wrote Bloomberg Intelligence senior analyst Jennifer Rie this month.

While progressive appointments at the Justice Department and FTC will influence enforcement, policy proposals could be harder to turn into legislation. The Merger Enforcement Improvement Act, which Klobuchar introduced in early 2019 to modernize antitrust laws, has just a 50% chance of being implemented in the next one to two years, the data show, even with a Democrat-led Senate.

Pandemic Control

Managing the Covid-19 pandemic will be the No. 1 challenge facing either Biden or Trump, and the choices the next President makes on how to manage the crisis will have knock-on effects for dealmaking among health-care related companies.

A huge increase in the use of telemedicine services as people seek medical advice from home has already led to the $18.5 billion August tie-up between providers Teledoc Health Inc. and Livongo Health Inc., while demand for Medicaid and behavioral health services have also increased, according to research from PwC. On the other hand, small hospital groups or doctors’ networks that have seen fewer patients coming through their doors could be under pressure to find a buyer, the consultancy firm’s research shows.

Under a Biden administration, fiercer antitrust law would mean mergers between drugmakers are also likely to catch the FTC’s eye, with some potentially falling under the definition of so-called killer acquisitions. While the regulator has so far concentrated on tech deals where a large company bought and then “killed” a small competitor, its scope could broaden to include innovative health-care deals, Bloomberg Intelligence’s Rie wrote in a Sept. 9 note.

Energy Incentives

Energy deals have proliferated in 2020 -- more than $50 billion of transactions in the past three months alone -- as oil and gas prices plunged. But even more may come under a Biden administration. Increased carbon taxes, limits on drilling both offshore and on federal land and incentives for using renewable energy are just some of the Democratic policies that could threaten the oil giants and drive more mergers or asset sales.

For companies focused on sustainable energy sources, the outlook under a Biden administration is brighter. Electric-vehicle makers have already become one of the most hotly favored targets for blank-check companies to acquire, and new legislation to fund public charging stations could make them more desirable still. Bloomberg’s Election Matrix gives that policy a 90% chance of being implemented if Biden wins and the Democrats gain the Senate.

Trade War

Trump’s executive order forcing the sale of social media app TikTok, owned by China’s ByteDance Ltd., has shown how directly foreign policy can impact dealmaking. The ongoing trade war with Beijing has slashed the value of acquisitions of U.S. companies or assets by acquirers based in mainland China to just $13 billion this year, down from a record $93 billion in 2016. Any easing of that relationship under Biden would be positive for cross-border transactions.

The worst outcome for dealmaking overall might not be related to policy at all, according to Cleary Gottlieb’s Langston.

“Elections create uncertainty and that’s a stake in heart for M&A,” he said. “If there is an unexpected outcome or a delay in an outcome, you could see a pause in M&A while everyone figures out what just happened.

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