With US capital gains tax rates due to rise from 1 January 2013, will M&A activity increase as sellers look to exit before the new year?

Before President Obama extended the Bush tax cut regime on 17 December 2010 there had been much speculation that 2010 would see a flurry of M&A activity in the low and mid-cap markets, particularly amongst family owned companies, as sellers pushed for exits prior to 31 December 2010 in order to avoid the new year hike in capital gains tax. Similar arguments have again resurfaced with the extension to the Bush tax cuts due to expire on 31 December 2012 after which CGT will jump from 15% to 20%. Could we see a late flurry of M&A activity in 2012 with sellers accepting discounts in order to squeeze deals through before the end of the year? A closer examination of the 2010 deal data would suggest not. Figures from Thomson Reuters show that the number of low-cap deals (sub $50 million) involving US targets was down from 7,088 in 2009 to 6,656 in 2010, a decrease of 6%. Looking specifically at Q4 2010, the number of deals was also down from 1,839 in 2009 to 1,687 in 2010, a decrease of 8%. Therefore any notion that there would be a “rush for the finish line” did not materialise. The mid-cap figures (for deals valued at less than $500 million) show a similar pattern with deal volume for the same periods decreasing by 1% and 3% respectively. These figures suggest that the impending “fiscal cliff” will not cause a significant increase in the number of Q3 and Q4 deals. All the evidence indicates that it is more probable that sellers will hold-out for higher valuations, albeit with higher capital gains tax bills, rather than force deals through this year.