With Tax Overhaul on Back Burner, Companies Embrace M&A Abroad
Bloomberg) — U.S. companies are making overseas acquisitions now and waiting for tax changes later.
Intel Corp. said on Monday it is paying $15 billion to buy Israel’s Mobileye NV, and in January, Johnson & Johnson agreed to buy Switzerland’s Actelion Ltd. for $30 billion. In both cases, the corporations are paying for their acquisitions completely with cash they’d stashed abroad.
Other companies are doing the same, and more such deals are probably coming, said Marshall Sonenshine, chairman of New York-based investment bank Sonenshine Partners. These deals have contributed to a surge in overseas acquisitions: Publicly listed U.S. corporations have announced more than $60 billion in acquisitions of targets outside of North America this year, more than double the amount in the same period a year ago, according to data compiled by Bloomberg.
“There’s going to continue to be a very vibrant cross-border trade,” Sonenshine said. “There’s too much cash on corporate balance sheets. That cash wants to go someplace. If it can’t go home, it will travel.” Congress’s non-partisan Joint Committee on Taxation has estimated that U.S. corporations hold as much as $2.6 trillion of profit overseas that hasn’t yet been taxed in the U.S.
If the companies had waited, they may have been able to bring that cash back into the U.S. at a much lower tax rate, under proposed changes from both Congressional Republicans and President Donald Trump. While details of a tax plan have yet to emerge, it’s possible that corporations could’ve used that money for share buybacks, dividends, investments, or whatever else they thought made sense. Under current law, companies can defer U.S. taxes on offshore profit until they return the earnings to the U.S., at which point they must pay a 35 percent rate.
But the timing for major tax legislation is unclear as U.S. Congress focuses on a health care overhaul now. Senate Majority Leader Mitch McConnell said last week that tax overhaul may not be completed before Congress takes its recess in August. Trump and House Republicans have proposed differing plans, although the president’s plans so far have been less detailed.
“No one wants to wait for the tax change,” said Marc-Anthony Hourihan, co-head of Americas mergers and acquisitions at UBS Group AG in New York. “If you’re going to wait for that or time your deal around that, you can’t.”
In many cases, acquirers have good strategic reasons to make overseas purchases — Intel, for example, is buying a company that makes chips for cameras and driver-assistance features, in a bet on the future of self-driving vehicles. J&J is hoping to profit from bringing biotech drugs to market, broadening their potential uses, and getting more money from insurers.
The valuations in both cases were relatively expensive. Intel paid a 34 percent premium to Mobileye’s closing price before the deal was announced — a high price for a company with revenue of just $358 million last year, said Dave Novosel, an analyst at bond research firm Gimme Credit.
Spending the money now could also result in future tax savings. Under the proposed overhaul from Congressional Republicans last year, companies would have to pay an 8.75 percent levy on profit held overseas in the form of cash or cash equivalents like short-term government debt. If the income has been used to buy other assets, such as a factory or another company, the rate would be 3.5 percent.
Those possible savings could embolden companies to spend more on overseas acquisitions now, said Robert Willens, an independent accounting consultant.
“The only thing you can do based on what we know now is reduce the portion of the earnings that are held in cash,” Willens said. “If you can reduce the tax rate imposed on those by five or six percentage points, that’s a good day.”
Intel had $13.6 billion of cash and marketable securities abroad in the end of 2016, regulatory filings show, while Johnson & Johnson’s pile was $41.3 billion. Though they’re sizable, those numbers don’t even crack the top five list of companies with overseas debt, according to a December report from Moody’s Investors Service. Apple Inc. leads the stockpiling, having amassed some $230 billion at the end of last year.
“I’d be shocked if we didn’t have many more,” Willens said. “As these kind of deals increase, there is pressure on their peers to do the same thing.”