The Great Overseas Cash Grab

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By Michael J. De La Merced

For years, corporate chieftains have spoken wistfully of wanting to bring home the more than $2 trillion in cash US companies have socked away overseas—if it weren’t for tax rates of close to 40 percent.

Under President Donald Trump and a Republican-controlled Congress (even one divided over how to overhaul the health care law), these executives may finally get their wish for lower taxes on those funds.

And, if repatriation relief comes despite the current political uncertainty, deal-makers say it could generate a fresh wave of corporate mergers and acquisitions in the United States.

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“Repatriation, if it’s actually put in place, will be an important driver of increased M&A activity,” said Blair W. Effron, a co-founder of the boutique investment bank Centerview Partners.

As Trump and Republicans turn their eyes toward reshaping the nation’s tax code, corporate advisers are betting that lower rates will bolster what has already been a respectable level of deal-making. About $3.7 trillion worth of takeovers around the world were announced last year, according to Thomson Reuters, the third-best year for mergers in the last decade.

Roughly 31 percent of respondents to a survey of deal-makers by the Brunswick Group, a financial public relations firm, cited “corporate tax reform” as the biggest driver of mergers in 2017.

Bankers are betting on one change in particular: repatriation, where US companies bring revenue generated abroad back to the United States. US companies have long kept those proceeds sequestered in bank accounts that are designated for foreign holdings because of how the federal government taxes that money. (It’s worth noting that much of that cash is technically already in US banks.)

Few other countries follow the United States rules, which tax revenue no matter where it is earned and subjects it to the standard corporate rates of as much as 39.1 percent.

That system has led to a veritable ocean of cash being held in offshore accounts, because the tax is postponed until the money returns to the United States. A Congressional committee estimated last year that US companies held more than $2 trillion overseas as of 2015, with intentions of holding it there indefinitely. Much of that cash is generated by giants in the technology and health care industries, both of which generate substantial sales abroad.

Both Republicans and Democrats have argued that the current system is broken, and that the best way to bring that money home is to lower the tax rate on it. Democrats like Sen. Chuck Schumer of New York have said that revenue from at least a tax holiday could help finance a national infrastructure bank that could create new employment.

Last year, House Republicans unveiled a proposal that would eventually eliminate taxes on income earned overseas, after a transition period during which companies would pay from 3.5 percent to 8.75 percent on repatriated cash.

And then there is Trump, who has been outspoken about overhauling the tax code. During last year’s presidential campaign, he proposed a one-time 10-percent tax on repatriated cash, followed by an end to the existing system.

These proposals generally envision US companies taking those enormous sums and reinvesting them in operations back home, creating new jobs. But deal-makers admit that much of the cash would probably go toward mergers, many of which end up leading to job losses.

There is precedent for repatriation leading to deals. In the fall of 2004, Congress enacted a one-time “tax holiday” during which companies could bring money home at a tax rate of about 5.25 percent. The move was meant explicitly to promote job creation, and it prohibited using the money for buying back shares, though there was no real way to enforce that rule.

Ultimately, US companies brought back $312 billion, according to a 2011 report by the Senate’s permanent subcommittee on investigations. But the Senate report argued that the promised job creation didn’t materialize.

What happened instead, according to several studies, was more mergers. The number of deals announced in 2005 was up 9 percent over 2004, while 2006 saw a 26 percent jump over 2004, according to Thomson Reuters. Bankers have conceded that not all of that increase was because of repatriation, but say the inflow of cash absolutely helped increase deal activity.

Take Oracle, which told the Senate that it used nearly $11 billion of the money that it brought home to strike two sizable acquisitions, including the $10.3-billion takeover of the corporate software maker PeopleSoft.

That would likely happen again under a new repatriation scheme, advisers say. The biggest impact would be in the number of deals struck within the United States, some of them added.

“Despite the tax cost associated with mandatory repatriation, US companies who can access their accumulated offshore cash should be more open to US acquisition targets that otherwise would be more difficult to finance,” said Richard Casavechia, the head of mergers structuring at Barclays, although some companies, he added, would choose instead to use offshore cash to invest in overseas operations.

Importing trillions of dollars would mesh with other conditions favorable to deal-making, including interest rates that remain low and a domestic economy that continues to perform well. And investors and politicians alike would put pressure on companies to use the money for growth, rather than simply buying back stock.

“In the political environment we’re in, companies will certainly be looked upon more favorably that make capital investments or do M&A,” said Robert Kindler, the global head of mergers and acquisitions at Morgan Stanley.

Kindler added that the current rate of deal-making in 2017 has been held back because of uncertainties over tax issues.

All of this optimism assumes that repatriation ends up inside a politically palatable tax package. Following the failure of the Republicans’ health care bill, the viability of a broad tax overhaul is up in the air. Serious fissures within the Republican caucus emerged during the health care debate, while newly emboldened Democrats may choose to drive a tougher bargain in future dealings with Trump.

Still, an issue like repatriation that has won bipartisan support in some form appears to be one of the more palatable options at the moment.

“Comprehensive reform seems less likely,” said William G. Gale, a senior fellow at the Brookings Institution. “Smaller tax reforms like tax holidays seem more likely.”

 

© 2017 New York Times News Service

Image Credits: Robert Meganck/The New York Times