By now it is well known the new tax reform legislation will significantly impact the taxation of U.S. businesses.KPMG also believes certain components of the new tax law could propel merger and acquisition (M&A) activity in the financial services sector, particularly the corporate tax rate reduction, the limitation on deductibility of interest expense, and the significant structural changes to multinational taxation.
It is widely anticipated that the additional cash flows generated from the corporate tax rate reduction could stimulate investment. Corporate M&A is one of the many potential uses of this additional cash, and we expect an increase in transactions in the financial services sector for this reason.
Financial services entities will not be without their own tax-related challenges, however. The newly enacted limitations on interest deductibility may reduce borrower demand for loan products. We believe this may cause lenders to seek additional revenue sources, such as niche lending divisions and fee income products. These service offerings are often obtained through acquisitions rather than developed internally. Additionally, limitations on interest expense deductibility are applied on a net basis (interest expense in excess of interest income), which creates an incentive for debt-heavy finance companies to acquire additional origination channels to increase interest income.
Another feature of the tax reform legislation is the one-time “repatriation” charge on accumulated earnings held overseas (15.5 percent for cash items and 8 percent for noncash items). Many taxpayers could elect to pay this charge over eight years and face a cash tax burden across this time period. At the same time, prospective foreign earnings will now be eligible for repatriation without an incremental U.S. tax cost, and thus can be deployed to fund expansion through M&A.
Reinsurance businesses may be subject to certain “base erosion” rules contained in the new multinational provisions. This may lead to the movement of blocks of off-shore insurance business on-shore, both within an organization, as well as between organizations, in order to enhance tax efficiencies. In addition, some financial institutions that previously relied on deferring U.S. tax on foreign business operations under the subpart F “active financing” exception may find themselves subject to the new minimum tax (GILTI), albeit at a reduced rate.
Other financial services sectors can expect similar challenges and opportunities as the effects of the new tax law become better understood. Initially, though, increased cash flow from lower tax rates, along with potential capital structure rebalancing and multinational tax efficiency planning, could alter the financial services M&A landscape.
For more information from KPMG regarding tax reform, please refer to KPMG’s Tax Reform homepage.
Bank M&A has remained robust over the last several years, and M&A in this sector is likely to remain active. But are deals good for shareholder value? New KPMG research reveals that the market does generally reward acquirers in the banking industry, and identifies several factors linked to transaction success.
The current deal environment is as challenging as ever, and because of increased competition, acquirers need to take an offensive stance when pursuing deals. Today’s evolving data and analytics tools can provide dealmakers with the information they need to gain a competitive edge. When used properly, data & analytics can transform the due diligence process and give acquirers more control of the most important types of information.
The newly issued CECL accounting rules are expected to have a significant impact on financial services companies by substantially changing how credit losses are accounted for and estimated. While CECL will not become effective until 2020, investors need to be aware of how the new rules will impact target companies’ earnings, capital, and valuation well ahead of the effective date.
KPMG’s M&A research indicates that there are three principles that can make a significant difference in enhancing the M&A sourcing process: improving the alignment between corporate development and strategy, balancing the sourcing of short-term actionable and longer-term desirable targets, and putting structure around the “first-pass” screening criteria to allow quicker gating decisions of valuable targets.
In this issue of The Pulse of Fintech, we examine trends and other emerging topics including the resilience of the fintech market, how corporates are leveraging fintech to expand into adjacencies, why fintechs are shifting their focus to B2B, how regulators are responding to fintech in different regions, and other fintech trends to watch for in 2018.
Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.