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Growth through Mergers & Acquisitions
Mergers and acquisitions have become a popular business strategy for companies looking to expand into new markets or territories. 2017 was the third year in a row with more than 50.000 M&A deals announced worldwide according to Thomson Reuters. The M&A market is a cyclical business; the volume of M&A is closely tied to high stock prices, availability of debt financing and the overall optimistic views on the economy.
Growth is vital in today’s Economy
The need for growth sparks companies’ desire to acquire other businesses. A business needs growth in order to sustain operations and in order to retain the best employees. A growing business also imparts confidence to customers and suppliers, vital in today’s economy. One strategy is to grow organically by enlarging your customer base or by developing new products. Another strategy is to grow through M&A. This can be a perfect way to achieve economies of scale, to eliminate competition and to speed your growth process. A business also sometimes gets acquired for technical expertise. This is so popular in the high tech industry that the deal has a nickname: “the Acquirehire”.
The US is the most advanced M&A market
The US M&A market is very advanced and it represent a large share of the M&A activity worldwide. An important reason is the government’s light regulatory hand. Although most deals involve competitors or similar businesses, US authorities rarely challenge transactions on antitrust grounds. Also the legal protections for employees are minimal, so acquirers can realize cost synergies with little government interference. Also, the US government welcomes foreign companies to buy into the United States. 2018 promises to be an exciting year in the field of M&A! The economy looks good, companies are generally healthy and will continue to think creatively… but there is also another reason: the Tax Cuts and Jobs Act…
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA). Under the Act, the highest corporate tax rate is reduced from 35% to 21%. This reduction will make the US more attractive for inbound M&A activity and also may increase the value of US based companies. In addition, the changes to the international tax rules should allow many US companies to access the cash of their foreign subsidiaries at a lower US tax cost, which could provide them with liquidity to fund acquisition.
The world’s largest public company announced that it expects to pay about $38 billion in taxes for the horde of cash it plans to bring back to the United States, which implies it will repatriate $250 billion in overseas cash. This announcement indicates that Apple has hundreds of billions of dollars in cash and off course fuels the rumor that Apple could acquire Netflix. Apple has always had faith it could transform itself without doing large acquisitions. The largest deal they ever made was the acquisition of headphone maker Beats for $ 3 billion. Instead, Apple occasionally buys smaller companies such as the music recognition service Shazam ($400 million, December 2017). If Apple changes course, that might become the biggest story of 2018!
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