Odd Washington deal creates anti-M&A synergy

Share alike. One small deal in Washington undermines larger ones designed on Wall Street. Two U.S. senators at opposite ends of political spectrum have joined forces to target favorable tax treatment for companies that combine by swapping stock. Movements against corporate concentration and ultra-rich are getting bigger.

Sheldon Whitehouse, a progressive Democrat, and JD Vance, a populist Republican, introduced a bill last week that would force shareholders receiving a buyer’s stock as currency in a merger to pay capital-gains tax right away inste of deferring it until y realize cash gains by selling equity. legislators say tax code subsidizes such “tax-free reorganizations,” like Capital One Financial’s $35 billion acquisition of Discover Financial Services, because cash deals by comparison trigger an immediate tax on any appreciation in value captured by acquirer and target’s investors.

It’s a half-baked argument, partly because or deal costs are subsidized, too. For example, any company that borrows money to fund a cash bid benefits from tax-deductibility of interest expenses. A more compelling case is that wealthy shareholders often hang onto stock for so long, sometimes bequeathing it to heirs, that y wind up avoiding capital gains tax altoger.

Furr, legislation hardly seems aimed at stuffing Uncle Sam’s pockets. re have been about $3 trillion of purely share-based U.S. deals over past dece. About 70% of shareholders, including overseas and pension funds, don’t pay U.S. capital gains taxes, leaving stakes worth $900 billion. Assume sum represents a 25% uplift on total cost basis, tax it at 20% and re would be about $4.5 billion in levies a year. crudely calculated figure is more than $1.4 billion available annually from eliminating carried-interest tax loophole, according to 2018 Congressional Budget Office research, but also would hardly register in a $6 trillion federal budget.

Inste, Whitehouse and Vance are mainly building on consolidation backlash led by U.S. President Joe Biden’s ministration. All-stock mergers are on rise, accounting for about 27% of M&A activity last year, highest proportion since 2000, according to LSEG data. Even as some Republicans have railed against trustbusting efforts, monopolistic behavior is increasingly becoming a bipartisan issue. latest measure against mega-mergers has little chance of becoming law anytime soon, but it contributes valuable synergies.