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Cash windfall from Trump's tax law may fuel corporate dealmaking boom

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President Trump signed the GOP's $1.5 trillion tax cut bill on Dec. 22. The new law lets firms bring overseas earnings back to the U.S. without a penalty once they pay a one-time levy and reduces the top tax rate to 21 percent. (Mike Theiler/Pool via Bloomberg)

For U.S. corporations seeking to grow through acquisitions, there’s no time like the present to make a deal.

A tax break signed into law by President Trump last month, which lets firms bring overseas earnings back to the U.S. without a penalty once they pay a one-time levy and reduces the top tax rate to 21 percent from 35 percent, is giving corporate America enough cash to fuel an increase in takeovers after two straight years of declines, according to Wall Street economists and analysts.

“One of the major impacts there will be from tax reform is a pickup in mergers and acquisitions,” Erin Browne, head of asset allocation and investment solutions at Swiss bank UBS, told the Washington Examiner.

“A lot of dealmakers will now start to repatriate some cash from abroad,” building reserves that can then be spent on buying companies, pushing U.S. dealmaking up from a comparatively mediocre $1.3 trillion last year, said Elizabeth Lim, a senior research analyst with Mergermarket, which tracks global acquisitions.

That’s a 34 percent drop from a record $1.97 trillion in 2015, when CEOs were racing to complete deals before interest rates rose from the near-zero levels maintained for seven years after the 2008 financial crisis.

Such pressure is, if anything, heightened now, since the Federal Reserve has hiked rates five times since December 2015, pushing interest rates to a range of 1.25 percent to 1.5 percent.

The central bank is signaling three more increases this year that would take rates to a range of 2 to 2.25 percent. It’s “a now-or-never situation” for dealmakers, Lim told the Examiner. “Interest rates may never be this low again in our lifetimes.”

That likelihood will create pressure to act quickly on companies trying to insulate themselves from the competitive threat posed by technology-powered startups, a challenge illustrated by the closing of bricks-and-mortar stores as e-commerce powerhouse Amazon.com takes market share.

Indeed, the digital transformation of established industries was among the motivators for the Walt Disney Co.’s $68.4 billion acquisition of media giant 21st Century Fox, the largest deal of 2017 — and one that occurred just before year-end.

In addition to a host of popular film franchises, the transaction would give Disney a controlling stake in video-streaming service Hulu. It would come just as CEO Bob Iger pulls out of a deal with Netflix in order to start a proprietary streaming service for Disney- and Pixar-branded films in 2019.

“Us having a direct relationship to the consumer is a positive thing for this company in terms of long-term value creation, but it's going to take a reset of sorts,” Iger told investors on a conference call in December. Combining with 21st Century Fox would create a company with “the content, the platforms, and the reach required to meet the growing demands of consumers,” he said.

Other large acquisitions in 2017 were CVS’s purchase of insurer Aetna for $67.8 billion in December and manufacturing conglomerate United Technologies’ agreement to buy aerospace supplier Rockwell Collins for $29.9 billion in September, according to Mergermarket.

Those deals, all in the latter half of 2017, reflect CEOs’ growing comfort with the policies of the fledgling Trump administration.

Since Trump and many members of his team “aren’t career politicians, it wasn’t really clear what direction they might go in” during the first six months of his term, Lim said.

“It’s not totally clear now,” she added, “but we have a better idea.”

Wall Street, for instance, has welcomed signals such as the appointment of Randy Quarles as the Fed’s banking supervisor, viewing him as more industry-friendly than his predecessor, as well as Trump’s selection of Mick Mulvaney, a critic of the consumer bureau that cracked down on lenders, including Wells Fargo, to lead the Office of Management and Budget.

Those appointments, coupled with a Senate plan to quintuple the level of assets that render a bank “systemically important,” and thus subject to heightened government oversight, will likely lead to further dealmaking in an industry where it was largely dormant after the 2008 financial crisis.

Lenders that might have been reluctant to make an acquisition when doing so would have taken their assets above $50 billion, the existing threshold for heightened supervision, would be more likely to pursue combinations if the plan cleared by the Senate Banking Committee in December becomes law, Jason Goldberg, an analyst with British bank Barclays, said in a note to clients.

“With a full year under the Trump administration, tax reform passing, and a clearer interest-rate path versus previous years, it may give corporate boardrooms more confidence around financial projections,” he said.