Biden-Harris Impact on M&A: Transactions Now, JVs Later, Finds EY Survey of Executives


EY’s survey examined how potential changes in corporate taxes, economic stimulus, infrastructure, onshoring regulations and sustainability, will affect U.S. business leaders’ capital allocation, M&A, investments, and overall growth strategies.

Key Findings
Here’s a quick snapshot of the survey results:
-79 percent said they are likely to accelerate M&A strategies, alliances and joint ventures should corporate tax rates increase following the election
-64 percent surveyed will acquire or build more domestic production in response to anticipated policies incentivizing onshoring

-44 percent said large-scale infrastructure investments to offset the economic impact of Covid-19 will create opportunities for their company
-47 percent of business executives indicated it will be difficult for their organizations to respond to increased regulation on environmental and sustainability practices

Tax Policy and M&A
Mergers & Acquisitions asked Bill Casey, EY Americas Vice Chair, Strategy and Transactions, to explain the relationship between expected tax increases and M&A activity under President-elect Joe Biden’s administration.

“President-elect Biden had proposed increases to the corporate tax and individual capital gains tax rates, so sellers would be motivated to sell in a lower tax environment, thereby accelerating deals,” Casey explained. “He has also proposed eliminating step-up in basis for estates. Combined with an increase in capital gains rates, that would provide substantial incentives for privately held businesses to sell sooner than later. And following a tax rate increase, there would likely be an increase in joint ventures and alliances, as companies would look for structural alternatives to buying and selling in a high-tax or less tax-efficient environment. JV’s and alliances offer a highly tax-efficient means of assets or combinations of assets held by companies.”

“Additionally, Biden has proposed a reversal of the Tax Cuts and Jobs Act of 2017, including immediate expensing of capital expenditures. Buyers would have a significant tax advantage to buy sooner than later to be able to deduct 100 percent of the fixed asset value in an asset deal. Increased tax rates, particularly on foreign operations and combined with incentives for domestic manufacturing, would accelerate transactions on U.S. manufacturing assets and capacity.”

ESG Challenges
Nearly every corporate strategy will be impacted by sustainability regulation, the study found. Business leaders surveyed said they view the sustainability imperative as challenging, with 96 percent indicating their current portfolio strategy will be affected. Further, about half said it will be difficult for their organizations to respond to increased regulation on environmental and sustainability practices. This comes at a time when environmental, social and governance, or ESG, has gained prominence among investors and dealmakers as a key consideration in the due diligence process.

“There’s a growing focus on nonfinancial performance and value creation metrics from investors and consumers as companies are expected to be global corporate stewards,” Casey explained. “To meet those demands, we found that 44 percent of companies are looking to form coalitions with corporate customers, suppliers and competitors, and an equal amount are making changes internally through new investments in clean, sustainable assets. But no one thinks it will be easy.”

Home Grown
Federal policies and regulations aimed at increasing domestic onshoring of production and operations are also expected to have a significant impact on corporate strategy, with more than 64 percent of U.S. business leaders indicating they would acquire or build more domestic production in response.

Infrastructure Investment
U.S. business leaders are also considering the impact of potential economic stimulus and investment in infrastructure by the federal government. They see these actions as critical for success, as 44 percent indicated large-scale infrastructure investments to offset the economic impact of Covid-19 will create opportunities for their company. A nearly equal percentage (43 percent) indicated large-scale infrastructure investments will stimulate the US economy, and 42 percent indicated they will create opportunities for customers.

Digital Boom
“Digital transformation and automation have been well underway at many companies but have significantly accelerated as the result of consumer demands, concerns about employee health and well-being, the massive shift to working from home and the prospects of changes in tax policies,” added Casey.

Loren Garruto, EY Global and Americas Corporate Finance Leader, Strategy and Transactions, added: “Companies are innovating their capital deployment strategies — from reinvesting divestment proceeds to boosting their digital capabilities through M&A, rather than building resources internally — to stay ahead of current market and economic disruption.”