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EY survey finds savings from US tax reform spurs reinvestment through research & development and mergers & acquisitions

Ernst & Young –

  • 73% of companies surveyed are likely to accelerate M&A strategies, driven by mid-cap companies
  • 48% of companies surveyed are willing to pay more to acquire companies now compared to before tax reform
  • 89% of companies surveyed plan to enhance compensation

US companies are eying growth initiatives as they seek to deploy anticipated tax savings from the Tax Cut and Jobs Act (TCJA), according to the EY Tax Reform Dollar Deployment Survey, conducted jointly by Ernst & Young LLP’s (EY) Transaction Advisory Services (TAS) and Tax businesses. As companies combat digital disruption and seek innovation through a variety of avenues, 47% said they will increase research & development (R&D) spend and 42% are planning to use those savings to pursue mergers and acquisitions (M&A).

In addition, the survey found that almost three-quarters (73%) of executives are likely to accelerate corporate M&A strategies for the year ahead. Of those respondents, 94% plan to pursue transactions under $1 billion.

“While much of the discussion is focused on dollars, the key word for me is strategy,” said Bill Casey, EY Americas Vice Chair of Transaction Advisory Services. “This legislation has undeniably created opportunities for corporates across sectors, but with valuations high, competition relentless and the pressing need for companies to grow beyond GDP, they must not lose sight of their long-term goals, the future of their businesses and how this capital can be strategically deployed to get them there.” 

According to the survey, mid-cap companies are particularly reactive to reform, with 82% planning to accelerate M&A plans with tax savings versus 72% of large-cap companies and 69% of small-cap companies. This enthusiasm applies to both US and cross-border transactions: 60% of mid-caps view domestic deals as more attractive post-tax reform versus only 48% of small-caps and 43% of large-caps; 59% of mid-cap companies view cross-border deals more favorably compared to only 43% of large-caps.    

Mid-caps may drive up high valuations

While 48% of surveyed companies overall are willing to pay more for acquisitions in light of tax reform, three out of five (60%) mid-cap executives said they are willing to up their bids compared to only 45% of small-cap and 39% of large-cap executives. Of note, 32% of large-cap companies say tax reform legislation has not impacted their willingness to pay more for companies, suggesting large-cap players are sticking to their pre-existing strategies.

Among those whose M&A strategy will be accelerated by tax reform, 91% of respondents say Corporate Social Responsibility (CSR) considerations are important when evaluating an M&A deal. Although executives are enthusiastic to act, a majority (52%) cite concerns about regulatory policies in the US as an obstacle to leveraging cash from tax reform for inorganic growth. Concerns about the price of labor in the US (43%) also ranked highly as a factor that may hinder tax reform-enabled M&A.

“Tax reform has had a clear impact on transaction, operational and people strategies, and it will be important to see how these potential changes affect the overall economy in the long term,” said Kate Barton, EY Global Vice Chair, Tax – Elect. “One key consideration for companies in this M&A environment is activist investors, who will have heightened expectations for the use of cash that has been repatriated. Management and boards should be prepared to respond and act on their investment strategies to drive shareholder value and confidence.”

Repatriation accelerates

Tax reform is accelerating plans for repatriation of earnings to the US, with 69% of respondents saying they are likely to repatriate more overseas earnings in 2018 than they would have without reform. On average, these companies estimate that they will repatriate 8% of overseas earnings as a result of the new legislation. Given the estimates of $2.6 trillion being held overseas by corporations, these company estimates suggest that repatriations to the US of global earnings specifically because of tax reform could be significant.

Mid-cap companies are leading repatriation efforts, with 72% planning to repatriate overseas earnings versus 61% of their large-cap counterparts. Of the mid-cap companies that plan to repatriate, 92% plan to repatriate 5% or more of their overseas earnings versus 74% of large-cap and 63% of small-cap companies.

Other investments of importance

Because of tax reform savings, 75% of executives say their company is likely to expand manufacturing efforts in the US. When asked how tax savings may contribute to CSR priorities, 36% plan to increase investment in their local communities and 29% plan to increase charitable donations. Additionally, 66% are likely to pass some of their tax savings on to customers.

Workforce investment to grow

The survey indicates that tax reform has motivated companies to invest in their people, with 89% of companies planning to enhance compensation due to the anticipated benefit of tax reform. In terms of job creation, 38% of mid-cap companies plan to use tax reform savings to create jobs, which is a focus for only 19% of large-cap companies. Mid-cap executives also appear to be the most interested in increasing salaries (33%) and paying bonuses (28%) with their tax savings.  

Compliments of Ernst & Young – a  member of the EACC in New York