New Admin- Impact On Value

Prognosticating the impact of soon-to-be President Trump has become a cottage industry.  As a valuation specialist, one area that is vastly under-opined is a look at what impact a Trump Presidency might have on valuations.  In our view?  Likely positive… with caveats.  Let’s look at some issues that might impact value.

Taxes

There’s been considerable chatter regarding a reduction of the C-Corp tax rate to a flat 15% (as well as some regarding S-corps, but without a lot of clarity on what that would mean for a pass through entity. ).  How might such a reduction impact value?  For one it will through a lot of modelling out the window that is based on post-tax cash flow.   Second, such a tax reduction could create additional capital available for investment in other activities, to include M&A.  But from my point of view maybe the most interesting would be creating a huge window of opportunity for small business C-Corps that are tough to transact because of the tax burden.

More on Taxes

Trump long campaigned on a series of pledges to reduce overall taxes.  One interesting are is a “tax holiday” meant to stem so-called corporate inversions and other mechanisms to keep cash offshore and tax sheltered.  Apple famously has over $180 billion overseas.  In total U.S. companies are estimated to hold $1.4 trillion offshore.   If companies are convinced to repatriate that capital back to the U.S, what might they do with it?   One option would be to return it to shareholders – something that companies are often loathe to do.  Another option: go shopping.  A large repatriation of capital could spur significant M&A activity as companies seek to deploy capital swiftly.  The effect?  A lift in valuations.

Affordable Care Act

Love it or hate it, the Affordable Care Act (aka “Obamacare”) has been a big deal.  Trump campaigned on the premise of repealing the act.  To the extent that he does – and that healthcare costs decreases for small and medium businesses – the result could be an increase to the bottom line.  Of course there’s a lot of assumptions baked in there: will it get repealed?  Will insurance rates change? Will companies be stuck paying relatively the same rates in order to attract talent?  Hard to say.  But if business owners can reduce costs as a result, those reductions directly correlate to higher value.

Minimum Wage

It’s a pretty safe bet that the Trump administration won’t be supporting a $15 minimum wage anytime soon.  I’m of the opinion that over the longer term such an increase will be inflationary: to support increased costs, companies will increase prices to bear those costs.  But in the short term a dramatic increase at the low end of the wage spectrum is sure to hurt profits.  At the very least guarding against an increase prevents a decrease in valuations.

Protectionists Trade Policies

This is a tricky one:  protectionists policies might help some industries, but reciprocal actions from other countries are bound to have negative effects on others.  Source all of your product in China?  Probably best for your value if we don’t antagonize them into a trade war.

On the whole it seems likely that a business-friendly President will have a positive impact on company values.  Of course critical will be keeping the economy humming along.  Ultimately, though, value is going to continue to be tied to performance.  Faced with a sea of options, buyers reward market participants that outperform peers.  Always have, always will – regardless of who’s in the Oval Office.
X