As we make our way through December, we get closer to the New Year. But many companies aren’t thinking about the holiday parties and a fresh new start—instead they’re rushing to close deals before the year ends and the fiscal cliff arrives. What policy makers are planning to do to minimize negative effects of the cliff is unclear, as Democrats and Republicans have yet to agree on compromises.
Companies like Henry Kravis’s and George Roberts’s KKR are feeling pressure to close deals and purchase companies before the year is up to preserve current tax rates—which could see a rise going into 2013. It’s possible that the tax rate could jump as high as 23.8% from the current 15%, so it’s no wonder companies are impatient to close.
The uncertainty over what will happen is what is making many business owners anxious over the coming year. Some see making deals as the only way to stay ahead of the fiscal cliff and maximize profits before a potential tax hike. A potential increase to marginal tax rates means that making deals now is also good for private equity corporations like KKR.
Much of the activity now happening amongst potential portfolio and parent companies is completely reactionary, just as when rumors spread that a company might be about to fail and people then sell their stakes.
For private equity firms already invested in selling off portfolio companies, now is also a good time for them to finish doing so. In the case of companies already being slowly sold off (via stocks), the end of 2012 presents the best time to complete sales because tax increases could make profitability from stock sales go down.
But while there is currently a lot of activity between private equity corporations and smaller companies, that doesn’t mean it’s something that everyone is doing. In fact, many companies are simply waiting the fiscal cliff out. The market is not at its best, and with a slowly recovering economy, it’s possible that it will continue to improve and present better opportunities in the future.