Tax Cuts Prompt Biggest Merger Spree in Decades

As many of America's largest corporations benefit from the newly passed Republican tax overhaul that slashes their tax rate from as much as 35% to 21% and incentivize billions of dollars in overseas cash repatriation, bids for mergers and acquisitions so far in 2018 are at their highest level since the start of the millennium, reports The Wall Street Journal. (See also: Why Comcast's Sky Bid Could Hurt.)

Amid the backdrop of strong economic growth and rising confidence, the GOP tax plan has helped spur $325 billion in bids to start the year, adding to cash flowing back to investors via buybacks, which exceeded $200 billion in the three months leading to the end of February. As valuations skyrocket and deals warrant bigger earnings multiples, many on the Street are questioning whether M&A is the best way to spend the major tax savings in the long term. 

In January, Bank of America's head of equities and quantitative strategy, Savita Subramanian, indicated that the biggest winner in the tax windfall will be takeovers, which will most likely push this year's deal count to a record, as reported by Bloomberg. As opposed to the 2004 repatriation holiday, wherein 80% of proceeds were used on share buybacks, the analyst forecasts 2018 to see considerably less sent to shareholders and more on acquisitions. 

350 Deals?

The $1.2 trillion U.S. firms have amassed overseas belongs largely to tech and health care companies, which have historically chosen to spend more on M&A than capital investment and buybacks. As a result, a surge in foreign cash repatriation may bring the number of deals in the U.S. to over 350 this year, forecasts Bank of America. 

As the Federal Reserve looks to tighten monetary policy only gradually and companies and private equity remain firms flush with cash, the M&A party is only set to grow bigger. However, it isn't completely certain that some of this year's recently announced deals will go through. Comcast Corp.'s (CMCSA) bid to buy U.K. TV broadcaster Sky plc positions it against 21st Century Fox Inc. (FOX) and, potentially, Walt Disney Co. (DIS), while the Nordstrom Inc. (JWN) family has suspended its attempts to take the retailer private this year. (See also: Bets Against Junk Bond ETFs Reach Record High.)