Is Biden’s Proposed Tax Increase Fueling Unprecedented M&A Boom?

In recent days, the media has been abuzz with reports of a booming mergers and acquisitions (M&A) market. The first half of 2021 saw $2.5 trillion in deals closed, according to Bloomberg, which is unprecedented. Is the prospect for a rise in capital gains taxes by the Biden Administration one of the contributing factors to this recent boom? We asked some of the country’s top M&A advisors for their take on the issue.

Justin Schoenberg, an Atlanta-based vice president for investment banking at Stephens, believes that Biden’s attempts to nearly double capital gains taxes is one of the factors contributing to recent M&A activity.

“If you’re an entrepreneur and have a business where your capital gains can double and go from 20% to 40% overnight, you’re effectively weighing that against the future growth of the business,” he told me recently. “And at some point, you’re better off just selling now, as opposed to trying to continue to grow your company and get it to a higher point only to pay a higher tax rate,” he added.

The tech industry leads M&A activity this year with deals worth more than $671 billion. Bryan Cummings is the Managing Director and Head of Private Equity Coverage at DA Davidson, a company with dozens of offices in the country specializing in wealth management, capital markets, investment banking. Cummings does not attribute the tech industry’s increased M&A activity to Biden’s tax plan, whose impacts he describes as “sector dependent.”

“If you’re a high growth technology investor, you don’t care that much,” he said, believing that there is more significant growth potential in tech than some other industries. “We see lots of runway for technology and the integration of software into the broader industrial consumer economy, and so people are willing to pay up for that opportunity,” he added.

With the Democrats being in control of both the House and Senate, analysts say it is likely that the proposed capital gains tax will pass next year. The proposed tax increase from 20% to 39.6% will impact families earning at least a million dollars a year.

Jim Lawson, chairman at Lincoln International, believes the impact will be more on the lower middle-market businesses than the Fortune 500 companies.

“I think the upper end of the middle market will not have as much of a drop in it because it’s very much PE [private equity] oriented,” he said, echoing views expressed in a recent Citigroup note published in the media. Citigroup explained that the proposed plan would affect individuals in private equity, not alternative investments themselves.

Those running family-owned businesses should be most worried about the proposed tax raise, according to Jeff Johnston, managing director & head of M&A at KeyBank Capital Markets.

“I think there’s no doubt that’s having an influence probably mostly for you know, entrepreneurs or family-owned businesses,” he said. “We’ve talked to a lot of business owners and family, you know, people whose name is on the door, the company name is after them really thinking about this,” he added.

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