September 22, 2016

MBAF's Ira Silver discusses how the Presidential candidates' relative stances may impact the area of dealership mergers and acquisitions and the auto industry in general, in the article "What Impact Will the Election Have on the Auto Industry and M&A Transactions" published in Automotive Buy Sell Report.

Election year politics can have some strange effects on markets, and no one can deny that this election cycle has been a little stranger than most!

But now that the election is less than two months away, how does an election cycle in general, and more specifically the relative possible outcomes in November, impact the M&A outlook?

Business data giant, Intralinks, tried to answer that question in a July survey. The Republican party may generally be more “business friendly,” and Donald Trump may be known as a “dealmaker,” however, those in the survey, were not so sure a Trump presidency would be good for M&A. 52% of respondents believe the impact of a Trump presidency on the M&A market would be negative, while 54% of respondents believe a Clinton presidency would have no impact on the M&A market whatsoever, with 22% thinking that a Clinton presidency would negatively impact M&A.

Those that believed Trump would negatively impact M&A point to his “unpredictable style and fiery rhetoric” that could “trigger trade wars and create financial market volatility.” Interestingly enough, M&A professionals in the United States seemed to be less concerned about Mr. Trump’s “volatility” than their foreign counterparts. According to the survey, 44% of North American dealmakers said they believed Trump would have a negative impact on M&A activity, compared with 68% of dealmakers in Latin America (LATAM). More than 60% of respondents in Europe, the Middle East and Africa, felt that Trump would be bad for future deals.

Those in this survey seem to be taking a “do not upset the apple cart” approach. Acknowledging that M&A has been healthy and growing over the past two terms, both being held by a Democrat, they believe if another Democrat takes the White House, M&A activity should at the very least continue on this trend.

However, how reflective of the real world is that thinking, particularly as it relates to an admitted “wild card,” like Trump? A Trump presidency will likely create a much more favorable regulatory and antitrust climate, which could easily stimulate more deals. Certain sectors, such as coal, natural gas and oil are certainly posed to benefit from a Trump presidency. Is Auto among them as well?

Moreover, what have the previous administration’s taxation and trade policies, particularly NAFTA, meant specifically to the auto industry?

NAFTA and the Auto Industry

Donald Trump is no fan of NAFTA. He has said, “it has destroyed this country,” and has alternatively said, as president he would either “entirely renegotiate NAFTA” or he would “terminate it.” He has even pointed to the Ford Motor Co. as one of the companies a Trump administration would “go after,” for building cars across the border.

There can be no denying that NAFTA eliminated many blue collar jobs among autoworkers, and shifted many that remained to the more southern regions of the country. This led to the rise in popularity of not only Trump, but Democrat Bernie Sanders, both of whom took hard anti-trade stances. And yet, in some ways the auto industry has benefited from NAFTA, and as the election approaches, the question hanging over the industry is what effect altering or withdrawing from NAFTA might have.

Speaking with Automotive News, Daniel Ikenson, director of trade policy studies at the conservative Cato Institute, said, “If Trump were to come in and do what he says he’s going to do, it would destroy the industry. Everyone expects us to lead. When the U.S. engages in this kind of nonsense, it rattles the global economic foundations. It is very dangerous rhetoric.” He added, “If a President Trump were to think he could impose a 35 percent tariff, the whole system would come crashing down.”

In the same article, Mark Muro, senior fellow at the Brookings Institution, said that NAFTA may very well have saved the North American auto industry. “By offering a low-wage platform, the Mexican plants have increased the scale of auto production in North America, allowed further investment and I would argue allowed increased U.S. employment.”

Yet, we need to be reminded that railing against current trade policies always makes for a good political campaign message. But, it is Congress, and not the president that makes trade policy, so a President Trump couldn’t act unilaterally to impose his kinds of tariffs, even if he really wanted to.

Tax Plans of Each Candidate

Finally, what will the relative tax plans of each candidate mean to business and the health of the economy?

Generally speaking, the basic difference among the two candidates is that Mr. Trump proposes an expansive, and across the board change to the tax code, which will result in just 4 tax brackets ranging from 0% – 25%, which Trump claims will result in a reduction of taxes for all; while Mrs. Clinton favors an increase in taxes on just the “wealthiest” of Americans.

According to the non-partisan Tax Policy Center, Secretary Clinton’s plan could raise the taxes of high-net worth individuals by as much as 3-5%. Clinton’s plan calls for increased taxes on upper income earners, to pay for her platform’s progressive proposals, such as reduced and free college tuition, and lowering the age of Medicare accessibility.

Not surprisingly, high net worth individuals fare much better under Mr. Trump’s tax plan. Looking at the same income levels above, the Tax Policy Center’s analysis found that singles and married joint filers earning between $143,000 and $209,000 would see an average tax cutof $7,731 or 4.3%.

Trump’s tax plan is a gift tied up in gold ribbons and bows to the 1%. This group, which is currently paying a near 40% tax rate, would see it slashed to 25%, while also cutting taxes on investment income and corporate profits. According to the Center, this wealthiest group of Americans would see an average tax cut of $275,000 or 11.8%.

Winners and Losers

While Trump’s proposal offers some tantalizing tax cuts to all, and especially to high net worth individuals, it will result in a significant drop in revenue to the government, a shortfall of $500 billion next year and nearly $10 trillion over the next decade, according to the Tax Policy Center. However, Trump’s plan should reap the benefits of supply-side economics which has been lacking and slowing the recovery under 8 years of democratic policies. Lower taxes across the board means more cash in the pockets of more individuals and businesses, which will add jobs. More cash and more jobs, means more auto sales.

Clinton’s proposal, while mostly being paid for by high income earners, will result in increased revenue, to the tune of an extra $30 billion in 2017, and a total of $1.08 trillion over the next decade. Her plan, while filling the government’s coffers to pay for more entitlement programs, takes cash away from businesses and individuals, which will more than likely negatively impact the auto industry.

Ultimately what either plan will mean to the economy, the industry, and M&A transactions remains to be seen, not only because of who the next occupant of the White House may be, but exactly what he or she will be able to accomplish once they get there.

Ira Silver, CPA, CGMA, is a principal in the Tax and Accounting Department at MBAF and is the principal-in-charge of the firm’s Orlando office. Ira has been in the public accounting profession since 1982. He can be reached at (407) 781-0150 or isilver@mbafcpa.com.

Click to read the article on Automotive Buy Sell Report™