One of the three major changes included in the Tax Cuts and Jobs Act of 2017 (TCJA) that impacts multinational companies (MNC) is the ability to repatriate cash from overseas. The TCJA makes it easier for MNCs to get cash earned abroad back to the United States. A sudden increase in cash on an MNC balance sheet could lead to share buybacks, an increase in capital investment, prepayment of interest-bearing debt, employee bonuses, one-time dividend payment or an increase in merger and acquisition (M&A) activity, among other options.
It should not be a surprise to see M&A activity increase over the next 12 to 24 months due to the TCJA. Prime private companies to be acquired tend to have strong management teams (non-owner) and/or have a market presence with unique products or services. Other great private company candidates for M&A activity are companies in highly fragmented industries (industries made up of many smaller companies).
In looking at reported M&A data for the first two quarters of 2018, it appears that the price of companies is starting to increase. For firms with annual sales between $1 million to $5 million, the median EBITDA multiple in 2016 was 4.17x, then 4.54x in 2017 and 4.59x in the first 2 quarters of 2018 . There are many factors affecting the pricing multiple, but at the end-of-the-day, the market is willing to pay more for assets in the current economic environment, which is good for owners of privately-held companies looking to sell their interest over the next few years.
Mike Metzler, CPA/ABV, CMA, CGMA, ASA