Fiscal cliff deal to help spur M&A activity

The agreement preventing the US from going over the so-called ‘fiscal cliff’ comes following a year in which US merger and acquisition activity fell 4.7% to $769bn.

The US government’s passage of legislation to avoid a combination of automatic tax increases and spending cuts known as the “fiscal cliff” should help encourage merger and acquisition activity that has stalled in recent months.

US buyouts during the fourth quarter of 2012 dropped 29.8 percent compared to Q3, falling to $26.7 billion “as the US election and prospective fiscal cliff took their toll”, according to Mergermarket. The last three months of the year marked the lowest level of fourth quarter M&A activity since 2009.  Total M&A activity in the US meanwhile, dropped 4.7 percent year-over-year, to $769 billion.

“Financial transactions, the use of leverage and things like that just weren’t going to happen until the fiscal cliff came to a head,” Greg Braca, head of corporate and specialty banking at TD Bank, told Private Equity International. “There is a fair amount of pent up demand. People will start putting some liquidity to work.”

Financial transactions, the use of leverage and things like that just weren’t going to happen until the fiscal cliff came to a head

Greg Braca

The deficit reduction agreement passed earlier this week resolves several US tax issues, raising taxes on households earning $450,000 per year and individuals earning $400,000 per year from 35 percent to 39.6 percent.

Not included in the deal was a change in the tax treatment of carried interest, which was preserved as a capital gain. Democrats, led by the Obama administration, have repeatedly called for carry to be redefined under higher ordinary income tax rates. Carry tax will still however go up, as the deal restores a 20 percent tax on capital gains (previously taxed at 15 percent) for wealthy taxpayers.

Despite the agreement preventing the US from going over the fiscal cliff, uncertainty remains for a number of longer term issues, such as the US government’s ability to raise its legal borrowing limit and the implementation of across-the-board cuts to all federal agencies, which will be addressed later in the year.

“That’s really just been punted out until March,” Braca said. “There will be a couple of weeks of people feeling okay and going back to business, but this will quickly turn into the pundits and media getting pretty frenzied up over the next several issues.”

Despite the limitations of the fiscal cliff agreement, the legislation comes at a time when market conditions are relatively favourable for dealmaking, according to Braca.

“You’ve got decent valuations [and] a lot of excess liquidity in the market,” he said. “I am cautiously optimistic that you’re going to see some deals get done and a freeing up of some of the liquidity.”