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Published in Finance

Survey: Federal tax increases among top concerns for M&A sector

BY Friday, April 09, 2021 12:49pm

Experts view the mergers and acquisitions market and U.S. economy with slightly more optimism than six months ago, although the prospect of corporate and other federal tax increases has them concerned about the resulting effects on deal flow.

The findings come in a spring survey that law firm Dykema Gossett PLLC and the Association for Corporate Growth-Detroit conducted to gauge the M&A market going into the spring and beyond.

Tom Vaughn, co-leader of Dykema’s Mergers & Acquisitions practice COURTESY PHOTO

Higher federal taxes was among the top concerns of survey respondents.

More than four of 10 respondents ranked an increase in the corporate tax rate as the greatest challenge to M&A in 2021. A potential increase in individual taxes and the capital gains tax ranked third on the list of the top five M&A challenges this year. The survey results indicated that the possibility of higher federal taxes was a potential “dark cloud” that “looms large over U.S. M&A activity.”

“People are very worried we’re going to see significant changes in tax policy,” said Tom Vaughn, co-leader of Dykema’s Mergers & Acquisitions practice who’s based in the law firm’s Detroit office.

The biggest worry is for an increase in the corporate tax rate, which President Joe Biden has proposed to raise to 28 percent from 21 percent as part of his $2 trillion infrastructure plan. Worries also persist about the future of estate taxes and the resulting effects on M&A, Vaughn said.

The federal tax concerns are in line with findings in Dykema’s annual fall M&A survey where the prospect of then-candidate Biden’s election as president and Democrats winning control of Congress ranked as top threats.

Restrictions from the COVID-19 pandemic remain a significant concern as well, ranking second among survey respondents this spring, although “with the increased rate of vaccinations, those concerns are lessening,” according to a report on the spring survey results.

Despite the concerns about taxes, the survey indicates strong optimism about M&A this year and the economy. The results for both are slightly better than findings in Dykema’s fall 2020 survey.

Among respondents, 73 percent expect the M&A market to strengthen in the next year from the prior 12 months, and 18 percent expect no change. The remaining 9 percent said they expect the market to weaken.

On the economy, 71 percent expect positive performance over the next year and 9 percent were negative.

Optimism about M&A and the U.S. economy result from “the strong deal market that we are seeing and everybody in the industry is seeing,” Vaughn said. The two generally track together, as optimism in the economy drives views on future M&A activity, he said.

“There’s no question that the strong U.S. economic outlook is definitely giving people confidence that we’re going to continue this M&A trend because people just see opportunity out there and opportunity for growth,” Vaughn said. “It’s been a very strong first quarter and people have particularly really strong prospects for the rest of the year.”

Partly driving the market is the high availability of capital right now. In private equity alone, U.S. firms had $728 billion in capital to invest at the end of the third quarter of 2020, according to the American Investment Council.

“There is so much capital out there that it is just hard to believe that that capital is not going to get deployed in M&A and that is going to keep M&A strong here for the foreseeable future,” Vaughn said.

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