A capital gains tax cut-part of Congress' proposed balanced budget deal-may have a big impact on the way mergers and acquisitions are structured, one analyst says, but he finds few allies among his colleagues.
As Stephen Blum, a partner in KPMG Peat Marwick's corporate finance group, sees it, "the proposed capital gains and estate tax cuts being considered in the current budget negotiations will stimulate certain kinds of mergers and acquisitions and change the way many business deals are made."
Notably, sellers would want cash, he said.
"The mergers and acquisitions marketplace has been dominated by large stock swaps," Mr. Blum said in an interview. "Companies with racy stock price multiples prefer to use their own shares to make acquisitions."
But a lower tax rate would encourage more cash transactions, and that could accelerate an already raging consolidation trend in the banking industry, he said.
The key advantage of stock swaps, said Mr. Blum, is that they are tax- free. But with a capital gains tax reduction, "deals would be more attractive in cash."
He said that means cash-rich banks with balance sheet liquidity would have the advantage in the coming economic environment.
Smaller banks with concentrated ownership would be the most likely to go for cash deals.
He also said that acquisition prices would tend to fall as sellers net more after taxes.
Other banking industry observers, however, could not agree less. Tax policy's effect would be "minimal," not a "watershed event," one said.
Ronald H. Janis, a partner in Pitney, Hardin, Kipp & Szuch, a Morristown, N.J. law firm, has handled a number of banking deals.
He said: "There are too many factors influencing the form of transactions to say the capital gains rate will have any determinative effect."
A tax break would be more likely to affect behavior after the fact, with individual investors more likely to sell shares to diversify their holdings, he said.
Anyway, he asked: "What are you going to do with the money? Put it in CD's?"
Stewart Boswell, senior vice president in NationsBank Corp.'s mergers and acquisitions group, said, "Consolidation is under way and will continue at an accelerated pace with or without a capital gains tax cut."
He noted that tax policy rarely affects strategic business decisions. "It's minimal as opposed to being a watershed event," said Mr. Boswell. The action will be much more significant for privately held companies, he said.
Michael T. Mayes, financial institutions group head at Advest Inc., said the debate in Congress is "having no effect or impact whatsoever on mergers and acquisitions between and among the community banks."
Moderating his position a tad, he added, a tax-rate cut "may slightly encourage some sellers to take cash for all or some part of the consideration because the cash would be a little more valuable with the change."
Even so, he said, "many selling shareholders in community banks are seeking more attractive stock of another bank. The deal is totally tax free, and it allows them to make even further gains if and when that company is acquired."
"People are motivated for other reasons to look at M&A transactions," said Eric van Nispen, senior vice president of Ryan, Beck & Co., West Orange, N.J.
"Fundamentally, the forces driving mergers have more to do with the capitalization of the banking industry than anything else," he said. But he acknowledged that a capital gains cut would be "helpful."
Mr. van Nispen noted that a deal could be done partly in cash and still be tax-free, so long as the amount doesn't exceed a threshold.
"The trend in banking has been toward less stock and more cash used in acquisitions, particularly the smaller deals," he said.
"That doesn't necessarily make the transaction taxable, as long as the recipient gets enough stock in the transaction to meet certain tax tests."
Observers agreed with Mr. Blum that a likely side effect of a capital gains reduction would be the sale, as opposed to spinoff, of noncore businesses.
Mr. Boswell of NationsBank said the banking industry has become very diversified. "Disposing of noncore assets in the most tax efficient manner will be important.
The ability to sell for cash and have a lower tax hit is clearly important and of interest to the industry."