Category Archives: M&A

18/4/16: Capital Gains Tax & Investment Distortions: Corporate Data from the U.S.

In our MBAG 8679A: Risk & Resilience:Applications in Risk Management class we have been discussing the links between taxation, optimal corporate capital structuring and investment, including the decisions to pursue M&A as an alternative strategy to disbursing cash to shareholders.

Lars Feld, Martin Ruf, Ulrich Schreiber, Maximilian Todtenhaupt and Johnnes Voget recently published a CESIfo Working paper, titled “Taxing Away M&A: The Effect of Corporate Capital Gains Taxes on Acquisition Activity” (January 26, 2016, CESifo Working Paper Series No. 5738: The paper links directly taxation structure to M&A decisions and outcomes.

Per authors, “taxing capital gains is an important obstacle to the efficient allocation of resources because it imposes a transaction cost on the vendor which locks in appreciated assets by raising the vendor’s reservation price in prospective transactions.” Note, this is an argument similar to the effects of limited interest deductions on mortgages and transactions taxes on property in limiting liquidity of real estate.

“For M&As, this effect has been intensively studied with regard to shareholder taxation, whereas empirical evidence on the effect of capital gains taxes paid by corporations is scarce. This paper analyzes how corporate level taxation of capital gains affects inter-corporate M&As.”

Specifically, “studying several substantial tax reforms in a panel of 30 countries for the period of 2002-2013, we identify a significant lock-in effect. Results from estimating a Poisson pseudo-maximumlikelihood (PPML) model suggest that a one percentage point decrease in the corporate capital gains tax rate would raise both the number and the total deal value of acquisitions by about 1.1% per year. We use this result to estimate an efficiency loss resulting from corporate capital gains taxation of 3.06 bn USD per year in the United States.”

I am slightly sceptical about the numerical estimate as the authors do not appear to control for M&A successes. However, since the lock-in mechanism applies to all types of re-investment projects, one can make a similar argument with respect to other forms of capex and investment. One way or the other, this presents evidence of distortionary nature of U.S. capital gains taxation regime.

9/2/16: We’ve Had a Record Year in M&As last… next, what?

Dealogic M&A Statshot for the end of December 2015 showed that global M&A volumes have increased for third year running, reaching USD5.03 trillion in 2015 through mid-December. Previous record, set in 2007, was USD4.6 trillion.

  • 2015 annual outrun was up 37% from 2014 (USD3.67 trillion) 
  • 2015 outrun was the first time in history that M&As volumes reached over USD5 trillion mark.
  • 4Q 2015 volume of deals was the highest quarterly outrun on record at USD1.61 trillion, marking acceleration in deals activity for the year
  • There is huge concentration of deals in mega-deal category of over USD10 billion, with 69 such deals in 2015, totalling USD1.9 trillion, more than double USD864 billion in such deals over 36 deals in 2014.
  • Even larger, USD50 billion and over, transactions accounted for record 16% share of the total M&As with 10 deals totalling in value at USD798.9 billion.
  • Pfizer’s USD160.0 billion merger with Allergan, officially an ‘Irish deal’, announced on November 23, is now the second largest M&A deal in history (see more on that here:

The hype of M&As as the form of ‘investment’ in a sales-less world (see here is raging on and the big boys are all out with big wads of cash. Problem is:

The former, however, is trouble for investors, not management. The latter two are trouble for us, mere mortals, who want well-paying jobs. which brings us about to 'What's next?' question.

Given lack of organic revenue growth and profitability margins improvements, and given tightening of the corporate credit markets, one might assume that M&As craze will abate in 2016. Indeed, that would be rational. But I would not start banking on M&A slowdown returning companies to real capital spending. All surplus cash available for investment ex-amortisation and depreciation and ex-investment immediately anchored to demand growth (not opportunity-creating investment) will still go to M&As and share support schemes. And larger corporates, still able to tap credit markets, will continue racing to the top of the big deals. So moderation in M&As will likely be not as sharp as moderation in corporate lending, unless, of course, all the hell breaks loose in the risk markets.

28/1/16: Irish M&As: Not Too Irish & Mostly Inversions

Experian latest figures for *Irish* M&A activities for 2015 show some astronomical number: Per release: “The number of deals on the Irish mergers and acquisitions (M&A) market increased by 10 per cent last year, its strongest performance since 2008…” Which is not what is impressive. Although the overall number of actual transactions hit 458 in 2015, up from 416 the previous year, it is the value of transactions that is beyond any belief.

Again, per Experian: “The total value of transactions reached €312 billion – up from €154 billion in 2014 and by some way the most valuable year for corporate deal making in the country’s history. Activity continues to be driven by the pharmaceuticals and biotech sector.” This number is a third higher than the value of exports of good and services from Ireland over the period of 12 months through 3Q 2015 and it is almost 60 percent higher than Irish GDP. In other words, using normal valuations multiples, you should be able to buy anywhere between 1/4 and 2/5 of entire Ireland on this money. In one go, and forever… And that’s one year worth.

Per Experian: “Irish deals accounted for around 3.6% of the total volume of European transactions in 2015, but 20.5% of their total value. In 2014, the Republic of Ireland again featured in 3.6% of European deals but contributed just 12.7% to their overall value.”

So conservatively, let’s say 1/3 of Ireland bought last year and, say 1/5 in 2014… that’s half the country economy in two years.

But how on Earth can a little country like Ireland attract such a level of financial activity? Why, remember that magic word… ‘inversions’ - yes, that same word that out Government denies applies to Ireland.

Well, Experian provides a small insight (they wouldn’t tell us the full story, but they can’t quite escape from telling us some. Enjoy the following: per Experian, Top 5 “Irish” deals announced in 2015 includedd:

  • Pfizer-Allergan at EUR143.564 billion
  • Teva Pharma - Generic drug business of Allergan at EUR35.454 billion
  • Shire - Baxalta at EUR29.533 billion
  • Willis Group Holdings - Towers Watson deal at EUR15.566 billion, and
  • CRH - Holcim & Lafarge deal at EUR7.671 billion

So, yep: tax inversion at the top, related to tax inversion at No.2, tax inversion at No.3… and none (repeat - none, including CRH deal) related in any way to Ireland, except for tax domicile of the companies involved.

Repeat with me… “There are no tax inversions into Ireland”… now, with zombie like intonation, please… “There are no…”

10/12/15: Europe’s M&A activity lowest in 17 years

While the U.S. companies are gorging themselves on M&As (see post here:, while shying real organic investment (see post here:, Europe's 'repaired' economy is shying away from both.

Europe's M&A cycle is weak - second weakest for the period of 1998-2015:

Which makes for some interesting reading, especially when one realises that most recent quarterly growth in Europe was underpinned by domestic demand and inventories build up... Time for ECB to start buying companies outright...

7/12/15: Another "Nothing to See Here" Chart for M&As

I have written over the recent months about the over-heating present in the global (and especially N. American) M&A markets (see posts here,  here and here) so it is only reasonable from continuity perspective to post some more data on the subject. Here it is :

Source: @Jim_Edwards

Looking at the volumes of M&A deals since around the start of 2Q 2014 through today, one cannot escape a simple conclusion: absent organic growth in revenues, and with shares buy-backs now being discounted in the markets (belatedly awakening to the reality of unsustainable valuations in the equity markets), current levels of M&A (over at least 18-21 months period) are simply, certifiably, clearly bonkers.