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US Publicly-Traded Buyers’ Interest In Acquiring Middle-Market Companies Increases

Posted on September 11, 2023 By

Thanks to the new 1% tax now being levied on any publicly traded US companies that buy back their shares, these larger, cash-rich companies have been given a strong incentive to seek acquisition targets.

While 1% of anything might not seem like a meaningful incentive, the Wall Street Journal reports that the new levy cost public companies $3.5 billion in the first half of this year alone. PayPal, for example, reported turning $24 million over to the IRS due to the tax, all funds that could have been used to acquire businesses with new technology and additional profits to add to their bottom line. Had PayPal instead decided to avoid the 1% tax and deploy that accumulated cash toward acquiring businesses, that would have added 99x the tax to their war chest, increasing it by the need to spend $2.4 billion per six months.

When public companies accumulate cash, they have a fixed number of options: (a) invest it in their existing business; (b) acquire additional businesses; (c) pay dividends; or (d) buy back some of their own stock from the market.

During a slow or uncertain economy, option (a), which generates "organic growth," becomes difficult for most companies, and we've seen such investments decline in recent quarters, according to government reports.

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Option (c) proved very attractive over the last ten years, as certain investors favor the regular cash payments the dividends provide. However, a "high" dividend yield has traditionally been around 5%. With today's interest rates, any investor can capture 5% in zero-risk government bonds, CDs, and even checking accounts.

Option (d) has become increasingly popular over recent years and is unlikely to go away, even with the extra burden it now carries. However, as Standard & Poor's reports, such buybacks have already declined 20% year over year because the calculus has now changed. In theory, the practice works to lift the repurchaser's stock price because the existing earnings of the company are spread across fewer shares after the buyback, lifting EPS, or "earnings per share." But the buyback does nothing to raise revenue or profit.

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In other words, it does nothing to contribute to growth, like paying dividends. Multiples on public companies not only depend on EPS but also growth. These are, in fact, the two most significant metrics for valuing public companies. While the buyback helps one and a strong economy can help the other, we now have a challenging economy and an effective extra cost associated with the EPS boost. 

Since the tax was announced, Benchmark International has seen a growing interest in its middle- and lower-middle-market clients across the US. "We are seeing not only a greater number of publicly traded bidders jumping into the processes for our larger clients but also seeing them devote much more effort to the early stages of the bidding process and seeing them dip lower in target size. Our team that handles Benchmark International's larger clients could easily see half our 2023 transactions close with public buyers," said Managing Director Clinton Johnston.

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Benchmark International is a global M&A firm that provides business owners with creative, value-maximizing solutions for growing and exiting their businesses. Benchmark International has handled over $10 billion in transaction value across various industries from offices across the world. With decades of M&A experience, Benchmark International’s transaction teams have assisted business owners with achieving their objectives and ensuring the continued growth of their businesses. The firm has also been named the Investment Banking Firm of the Year by The M&A Advisor and the Global M&A Network as well as the #1 Sell-side Exclusive M&A Advisor in the World by Pitchbook’s Global League Tables.






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