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Already at historic levels, plastics industry M&A prices could climb even higher under proposed tax bill

Jolly Sunshine Limited | Updated: Dec 12, 2017

While many things remain unclear about the tax reform being proposed by Congress, Polymer Transaction Advisors Inc. (PTA; Jackson Springs, NC), investment bankers to the global polymer industry, have shared some thoughts on the Senate version of the tax reform bill and how it might impact M&A activity in the plastics industry. gaming supply

First, and maybe most importantly, PTA points out that the bill reduces federal taxes for every income category except for those who have paid no taxes previously. It would also reduce taxes on wages and investment and corporate incomes, and it reduces substantially the paperwork needed to file federal income tax returns. plastic bag and trash bag and document file

According to the non-partisan Tax Foundation, the bill, if enacted by the Senate, will generate an additional 925,000 full-time jobs and $1.26 trillion in additional tax revenue over the next 10 years. The plan would bring us closer to tax revenue neutrality after accounting for the taxes of roughly $1.5 trillion reduced by the plan during the same 10-year time period.

When accounting for the likely increase in GDP, after-tax incomes for all taxpayers will increase by 4.4% over the long run. However, PTA notes, there is no consensus over the impact of the tax bill based on the economic models used and their completeness. The Tax Foundation uses a model that accounts not only for the cost of the bill in tax revenue initially lost, but also for the tax revenue increases that are likely due to the availability of additional cash to fuel the economy.    trading card sleeve and game card sleeve.       

As for M&As, PTA explains that M&A prices are already at historic all-time highs due to the availability of cash for investment, the lack of attractive debt investments and the all-time low cost of borrowing on even middle-market acquisitions. However, the tax bill is likely to further increase M&A prices. This is due to the following major factors:

  • The repatriation of foreign profits held overseas by U.S. companies. The tax bill enacts a one-time 10% tax rate for repatriation of currently deferred foreign profits resting in overseas bank accounts and 5% for reinvested foreign earnings. Current estimates of foreign profits repatriated is over $3 trillion. Assuming that $3 trillion are repatriated, this amount will be twice that of the $1.6 trillion from the 2009 Stimulus Package passed under the Obama administration. Unlike the 2009 Stimulus Package however, PTA said that the capital will go directly to companies that know how to use it to grow organically and by acquisitions. The equities market, already awash with cash taken from profits in the stock market, and corporate profits/dividends will have another huge stimulus to grow the economy. The additional cash will enable companies to make direct acquisitions and to provide dividend income to shareholders. The dividend income will ultimately find its way to private equity groups for investment in M&As. plastic binder and PU leather binder.

  • The tax bill reduces the public company corporate tax rate from 35% to 20%, which will provide immediate additional cash to reinvest in internal and external expansions, such as M&As.

  • Additionally, the tax bill reduces certain Sub S Corp. and LLC tax rates—i.e. “pass-through” businesses. These businesses are essentially manufacturing companies, which will enjoy a 23% deduction in their taxable income calculation. plastic deck box for Magic the gathering

The net effect is a reduction of the tax factor used to value companies—the discounted cash flow analysis, or DCF—by seasoned business buyers. The DCF model values the present worth of the selling company by including the estimated future after-tax cash flows. Any relief in taxes for the target company will result in increased after-tax cash flows available to the buyer, explains PTA.

This will inevitably result in higher business valuations, especially for public companies that will use their own reduced tax rate of 20% (down from 35%) as their new basis for valuation. The higher values from the after cash flows are partially offset by the lower tax shield on interest, resulting in a slightly higher cost of capital. However, in recent hypothetical valuations of possible business sellers to publicly-owned companies, PTA has identified a 10 to 12% increase in DCF valuations solely as a result of the lower tax rates used. Private equity buyers will also benefit from higher after-tax cash flows from sellers because of the 23% deduction, but somewhat less than public companies.

PTA reports that there is a growing scarcity of quality sellers in the market today. “The recent M&A acquisition ‘binge’ has been actually on-going since the beginning of 2010,” notes PTA. “In stable economic times, the number of new businesses and businesses for sale are balanced. In PTA’s view, the market for quality sellers in the plastics sector has been generally ‘oversold’ due to the multiple acquisitions of numerous buyers—the net population of available potential sellers has shrunk due to the wave of acquisitions during the past seven years.

“Most industry experts believe that M&A pricing is now at an all-time historic high, due to the availability of cash, low interest rates and availability of debt even on mid-market transactions, and the unattractiveness of investments in low-returning debt instruments,” said PTA. “The law of supply and demand should greatly favor quality businesses as we head into 2018, as larger numbers of buyers with greater amounts of cash seek an increasingly small group of sellers.”

PTA believes that the already historically high multiples of earnings paid may increase another 10 to 15%.