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Analysis: U.S. investment bankers' new pitch - Biden's tax hike

[October 21, 2020] By Joshua Franklin and Chibuike Oguh

(Reuters) - Investment bankers keen to win lucrative assignments have a new pitch for U.S. corporate owners: hire us to sell your company now or pay at least twice as much in taxes if Democratic presidential candidate Joe Biden has his way.

Biden has proposed raising the capital gains tax rate from 20% to 39.6% for those making over $1 million. He would also increase the corporate income tax rate from 21% to 28%.

Biden would have to win the presidency and his Democratic Party would have to gain control of the Senate and keep control of the House of Representatives in the Nov. 3 election for his tax proposals to become law. While far from certain, this prospect has been seized on by bankers hungry for new business.

"We urge all of our current and potential clients to take note of the potential forthcoming changes, along with their associated consequences, as they consider an exit strategy for their business in the near future," Houlihan Lokey Inc <HLI.N> bankers wrote in a note earlier this month.

The Biden campaign did not immediately respond to a request for comment.

The investment bankers' pitch is geared toward individuals and families, as well as private equity firms, who control companies and can decide when to sell them. It also targets company founders, who may only sell one business in their lifetime, making it the most important transaction of their lives.

The strategy appears to be working. Sales of privately held U.S. companies totaled a record $253 billion in the third quarter, up fivefold from the second quarter and up 51% from the third quarter of 2019, according to financial data provider Dealogic. This is despite the COVID-19 pandemic suppressing corporate valuations in some sectors.

"Since the summer we have seen a lot of dialogue from family offices about exploring a sale of some assets. Many of these investors are sophisticated about how they handle their affairs from a tax perspective," said David Perdue, a partner in investment bank PJT Partners Inc's <PJT.N> strategic advisory group.

One of the U.S. companies pursuing a deal because of tax considerations is Asplundh Tree Expert LLC, a family-controlled tree-trimming firm, according to people familiar with the deliberations.

The family that has owned Asplundh since 1928 has been keen to hold onto the company and resisted overtures to sell to private equity firms hungry for a quick flip. When one of these firms, CVC Capital Partners Ltd, convinced the Asplundh family to sell it a minority stake in 2017, it had to use a buyout fund it manages that is dedicated to retaining holdings for a decade or more, rather than cashing out after a few years.

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U.S. Democratic presidential candidate Joe Biden approaches his seat, ahead of an ABC Town Hall event at the National Constitution Center in Philadelphia, Pennsylvania, U.S., October 15, 2020. REUTERS/Tom Brenner/File Photo

Now the Asplundh family is working with investment bankers to cash out on part of its stake, partly because of its concerns about upcoming changes in the tax system, one of the sources said. It is seeking a valuation for Asplundh of as much as $10 billion, according to the sources. Asplundh did not respond to a request for comment.

Even if Biden wins and implements his tax plan, corporate owners may still have time to cash out. Most of President Donald Trump's corporate tax cuts, which were enacted into law in 2017, became effective in 2018, a year after he came into office.

Still, the big uptick in the divestitures of privately owned companies shows how some of their owners view Biden's election victory, and subsequent tax changes, as likely.

BEST PRICE VERSUS TAX SAVINGS

Goldman Sachs Group Inc <GS.N> advised on more sales of privately held U.S. companies year-to-date than any other, followed by Morgan Stanley <MS.N>, JPMorgan Chase & Co <JPM.N> and Bank of America Corp <BAC.N>, according to Dealogic.

To be sure, getting the best price is still the overriding consideration for corporate sellers, rather than saving on taxes, investment bankers said. Private equity firms, in particular, are wary of being criticized by investors if they think they sold a company for the tax benefit of buyout fund managers, rather than getting the best price.

"There is a tax consideration and there is a more strategic consideration. The tax consideration only applies if you are ready to sell and could attain attractive valuation multiples that could lead to a successful sale," said Solon Kentas, co-head of M&A for the Americas at UBS Group AG <UBSG.S>

(Reporting by Joshua Franklin and Chibuike Oguh in New York; Editing by Greg Roumeliotis and Lisa Shumaker)

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