It’s feeling a lot like 2010 all over again, and I’m betting we’re going to see a lot of M&A activity this year as a result.
It was February 13th, 2010, and my first day on the job at AutoTrader.com after spending a decade at sister company Manheim. I remember it vividly, as my first day just happened to be the weekend of NADA (held in Orlando that year).
Cox had decided that they were going to sell off a 25% stake of AutoTrader.com to private equity, and were already deep in that process. As it turned out, the successful suitor was Providence Equity Partners, who coughed up $640 million (and who, by the way, netted a 3.0x return -- not bad for a 3-year hold time).
My role at ATC was to oversee business development. Little did I know that we were in for quite a year of M&A, and as it turned out we had a chance that year to acquire vAuto, Kelley Blue Book and HomeNet within a span of 9 months.
Why was sell-side activity so busy during that particular year?
If you remember back to 2010, there was a lot of fear in the business press that the “Bush Tax Cuts” were going to be repealed. Bush’s Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) reduced the long-term capital gains rate to 15% from 20%. The law no longer treated capital gains as regular income but instead as long-term capital gains. Most of the tax cuts were scheduled to expire December 31st, 2010.
As it turned out, the fears were overblown. In fact, the reduced capital gains lasted until January 1, 2013, when the Bush Tax Cuts expired. (On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012, which reinstated many of the tax cuts, effective retroactively to January 1st).
Having said that, the fear in 2010 was palpable (and sensationalized in the press), and caused a flurry of sale activity that year, as entrepreneurs attempted to lock in their gains at a lower rate. And Cox (and by extension, me at AutoTrader.com) were the beneficiaries.
Fast forward to current day, and things are feeling pretty familiar. From all indications, a significant tax increase is coming to us sometime soon.
President Biden is planning the first major federal tax hike since 1993 to help pay for the long-term economic program designed as a follow-up to his pandemic-relief bill -- a package of measures that could include an increase in both the corporate tax rate and the individual rate for high earners.
While tax measures would not likely take effect until 2022, the amount of uncertainty is surely top of mind for entrepreneurs who are on the fence about whether they should sell now or hold.
The combination of stock markets reaching new highs, company valuations in the stratosphere, a tremendous amount of available capital in VC and PE funds, and the amount of change ahead in the automotive space, means that the threat of higher capital gains taxes will translate into vigorous company sale activity over the remainder of this year. Game on.
Read the April 2021 Automotive Ventures Intel Report for more.