United States: Investor Confidence, Disruption Risk And US Tax Reform Will Continue To Spur M&A Activity

JP Morgan recently released its 2018 Global M&A Outlook report, predicting that 1) investor confidence from solid GDP growth, 2) disruption risk from technological change, and 3) opportunities from the passing of the US tax reform will drive significant M&A activity in the year ahead.

Investor confidence

In 2017, nine out of ten equity sectors in the US achieved positive returns. The strong equity performance was driven by several factors, including:

  • strong corporate earnings growth across sectors (apart from the energy sector);
  • historically low interest rates;
  • low unemployment rates and improving GDP growth; and
  • increasing consumer and business confidence.

It is expected that solid GDP growth in all major economies and healthy equity and debt markets will continue to provide companies with confidence to pursue M&A opportunities with an emphasis on bolstering organic growth and shareholder value.

Disruption risk

Technological change continues to create disruption risk for big companies and drive cross-sector M&A activity as companies look to acquire new technologies and capabilities to compete. In 2017, there was over USD $950b in cross-sector M&A volume, which was 21% above the 10-year historical average of $794b.

As digitally-fluent millennials now represent the largest demographic with an increasing influence in the markets, companies will have to develop or acquire new technologies, especially in the retail sector, to meet millennials' expectations of instant delivery services and gratification, continuous purchasing relationships and the ability to compare prices, product information and peer reviews. Given the rate of technological advances and the reality of demographic changes, it is inevitable that technology will continue to create more differentiation between the largest, most successful firms and the rest of the market.

US tax reform

The Tax Cuts and Jobs Act of 2017 (US tax reform) was passed in December 2017 with seismic implications for US corporations. Most significantly, the US tax reform lowered the US corporate tax rate to 21%. This will likely lead to certain behaviour changes for US companies, such as repatriating cash to buy other US assets. Further, the new territorial tax regime (i.e., tax-free dividends from foreign subsidiaries) accompanied by a one-time transition tax on repatriated foreign earnings should increase cash balances on the whole and spur M&A activity for US incorporated multinationals.

The author would like to thank Peter Choi, Articling Student, for his assistance in preparing this legal update.


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