Tax inversion reform could cause a splash, but unlikely to sink M&A recovery
Inversions – unlikely to derail M&A
Tax inversion deals continue to gather a lot of press, with investors now questioning the
implications of potential reform on global M&A volumes and fees. While inversions accounted for 9% of announced M&A value in 2014, excluding inversion activity announced M&A value is still up 31% yoy. With fundamentals for a robust M&A cycle still firmly in place, we believe potential reform is unlikely to alter our positive outlook on the space. LAZ (CL-Buy) seems most insulated in case of a slowdown in inversion activity.
How big of a deal are inversion deals?
Inversion M&A volume has accelerated ($207bn announced ytd), accounting for 9% of total ytd announced volume and 10% of industry fee backlog amid widening global corp. tax spreads and growing overseas cash balances. While the headline figures look large, the deal flow has been very concentrated, with just 14 deals announced in ytd, almost entirely in Healthcare (3 deals account for 76% of all inversion deal value ytd). Given this concentration, the number of advisors impacted is limited.
Who is impacted?
Within our coverage, exposure to pending inversion deals has been limited. EVR (Neutral) seems to be the only one with meaningful exposure (14% of its total fee backlog per Dealogic) or roughly 5% of 2014 EPS. Overall, independent advisory firms have not had much exposure to recent inversion deals, as larger banks tend to dominate with a 76% market share of announced inversion deal fees in 2014. While there are lots of uncertainties with respect to reform outcome, given amount of cash outside the US, Healthcare and TMT could be the sectors most impacted if rules around inversions are changed. LAZ historically had lower exposure to both of these sectors, given the firm’s diversified Advisory base.
Still lots of runway for M&A
Despite a solid start to the year (up 36% yoy), M&A volumes are still 20% below prior peak and below historical average both as a percentage of market cap and GDP. As deal completions accelerate (days to close are down 9% in 2014 vs. 2013), we expect velocity to pick up further. Financial Sponsors and EU are still the biggest areas for further upside.