Jewkes said the interest in these subsectors is not surprising since pent-up consumer demand, fueled by increased personal savings rates, will continue to be unleashed on non-essential items like technology and leisure items, so activity in those industries would logically follow. “If there’s anything with technology, either smart home devices or other types of electronics and technology devices, I think organizations are interested in that space and investing there.”
Elliot Findlay, National Managing Principal of Mergers & Acquisitions for Grant Thornton, ties strong M&A activity in these sectors to a trend in consumers’ increased willingness to return to in-person experiences, including retailers that feature in-store attractions. Retailers that entice consumers to step foot in their stores by providing an entertainment experience such as live music, captivating video displays and upscale dining – “experiential retail” – are companies he is seeing regularly in recent M&A transactions.
Meanwhile, the retail subsectors of furniture, general merchandise, gas stations and convenience stores are not expected to experience as much M&A activity.
When asked whether brick-and-mortar or e-commerce retail businesses would see the majority of M&A activity, 60% of respondents say businesses with a combination of both would likely see the most activity. This echoes past experience of retail leaders that they need to meet customers where they are and provide them multiple ways to buy goods, given their increased expectations around purchasing flexibility. This data underscores the importance of the brick-and-mortar store and its position as a complement to the brand’s e-commerce platform.
Though the federal reconciliation bill, and its significant tax implications, are currently on life support, there is no question tax law changes will remain a central policy concern of the Biden administration. When asked how various tax policy questions would affect retail M&A activity, one answer that stood out was that respondents see a capital gains rate increase likely to be a net positive for M&A transactions, even though it would seem to take money out of the deals.
“The answer is not that a capital gains tax increase is good for retail, but it may spur current M&A activity to recognize capital gains before an increase,” said Candice Turner, National Managing Principal of M&A Tax Services at Grant Thornton. “A constant credible threat of increased rates would encourage M&A activity.” This way, a capital gains rate increase would spur M&A activity in the short term as a way of managing assets and see an increase in tax-deferred mergers and acquisitions over the long term.
Survey respondents see a phase-out of the pass-through deduction and an increase of the individual income tax rate as having a mostly negative impact on M&A activity. These taxes are now less likely to happen in 2022, so reservations about any negative effects would be lessened, Turner said.
Opinions are evenly divided on two tax issues with international implications, the 15% global minimum tax and overall international tax regulations. Unlike domestic tax rate hikes, international taxes have been the recent focus of significant change. The U.S. and most other nations backed the OECD pillars creating a 15% minimum tax and an online sales tax framework. In December 2021, the IRS completed an overhaul of the rules governing various international tax law changes instituted by the Tax Cuts and Jobs Act.
Turner added that companies contemplating mergers should realize that often the majority of taxation concerns won’t be federal but involve state and local taxes. “More than half the time, the problems we see in deals involve the target organization’s state and local tax position, including failure to file in states where the target has economic nexus and outstanding liabilities. The complications of state and local tax have made complete compliance almost impossible,” Turner said. “That’s really impacting M&A activity right now.” What’s unmistakable in this survey data is that industry professionals see retail companies as full participants in M&A deals in 2022. Company leaders examining the retail and consumer business environment should closely evaluate the risks and benefits of a deal, and in doing so, consider outside help to discern the best path forward.
*Source: PitchBook Data Inc.