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What Obama’s tax plans mean for M&A

By
Dan Primack
Dan Primack
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By
Dan Primack
Dan Primack
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July 10, 2012, 8:20 PM ET

FORTUNE — President Obama yesterday proposed an extension of the Bush tax cuts for those making less than $250,000 per year, and threatened to veto any bill that keeps all of the current rates intact. That last part also would seem to include capital gains tax rates — for everyone — which are scheduled to increase from 15% to 23.8% beginning January 1.

Bob Baltimore, a managing director with investment bank Harris Williams & Co., says that the markets are assuming the capital gains rate will rise, which is causing a spike in middle-market M&A and private equity deal activity.

We’ve seen this movie before. Back in 2010, before Obama surprisingly extended the tax cuts, we heard about sellers trying to get deals completed before December 31. Particularly owners of family businesses. The only problem was that many of the sellers were too late, launching their processes in the third or fourth quarters. Baltimore says that some of those same names are back, but this time began their engagements in Q1 or Q2.

He also says that certain private equity firms are pushing 2012 sales, due to a belief that there could be a 2013 change to the tax treatment of carried interest. No firms are saying so explicitly — it could be viewed as a violation of fiduciary duty to limited partners — but he believes the sentiment exists.

Harris Williams has seen an 83% increase in its number of first half deals completed year-over-year, and a 20% increase in engagements. Baltimore said he couldn’t quantify how much of that was sparked by tax issues, but believes it has played a VERY significant factor.

“As the market brushes up to December 31, there will be a bit of a blind man’s bluff,” Baltimore explains. “Will a seller take a discount in order to get a deal done and avoid the 2013 tax bill, or will they hold on and take a better deal with higher taxes? Buyers know this challenge is coming for sellers, and that it should create some opportunities.”

All of that said, overall U.S. M&A and private equity activity — including large-market deals — remains lower in 2012 than in 2011.

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About the Author
By Dan Primack
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