Category Archives: July

Big Deals: What’s Behind the M&A Surge? A surge of M&A activity began in 2014 and has continued in 2015. Why and what it means for investors and consumers

U.S. companies announced more than $1.5 trillion worth of mergers and acquisitions in 2014, a 55% increase over 2013 and the highest total since 2007. Altogether, 10,615 deals were forged. The pace continued in the first quarter of 2015, with 2,507 deals worth close to $406 billion.1

Why the sudden burst of M&A activity? And what does it mean for investors and consumers?

Corporate Cash

Since the recession, U.S. corporations have been building record cash reserves as a result of increased productivity (primarily from automation and cost cutting), a rising stock market, and a reluctance to spend on hiring and capital investment until corporate leaders were more confident in the economic recovery.

A similar reluctance applied to mergers and acquisitions. Instead, many corporations have tried to satisfy shareholders — who may see too much cash as wasted opportunity — with dividends and stock buybacks.

The tide turned in 2014, as the United States experienced its fifth full year of economic growth, the stock market continued to rise, and interest rates remained at record lows. High stock prices give a company more equity to use in acquisitions when stocks are the medium of exchange, while low rates make it easier to borrow for cash deals. One CEO who had made two acquisitions early in 2015 said, “It’s an optimum time.”2

Mergers vs. Acquisitions

Although mergers and acquisitions tend to be considered together in big-picture analysis, understanding the differences may help investors and consumers gauge the possible implications of a deal.

An acquisition is the purchase of one company by another that is paid for with stock, cash, or both. The target firm is absorbed by the buyer, and the buyer’s stock continues to trade. The target firm’s stockholders may receive stock in the buying company and/or have the option to sell their shares at a set price.

A true merger occurs when two companies of roughly equal size combine into a single company and issue new stock. In this case, stockholders of both companies generally receive shares in the new company.

Acquisitions are often announced as mergers when the deal is “friendly,” with both sides agreeing to what they consider to be fair terms. Hostile takeovers, in which one company purchases a controlling interest in another against the wishes of the target firm’s leaders, are typically announced as acquisitions.

The Good, Bad, and Unknown

The stock prices of companies involved in a merger or acquisition typically move up or down after the announcement, depending on how investors view the deal. The true results, however, may become evident only over the long term. Although no one can predict the future, it might help to consider the logic behind a given deal.

When a conglomerate gobbles up companies in multiple industries, as was more common in the late 20th century, the company may move out of its comfort zone and lose focus on its core business. Cross-industry deals, in which companies hope to grow by combining different products or services, might have potential, but the anticipated financial benefits may not materialize.3

The current trend is toward industry consolidation, which may create economies of scale and boost share value. The risk is that the market must be big enough to support continued growth; if not, the merger becomes a cost-cutting exercise. Under the right circumstances, however, the combined company could reach new customers, take market share away from competitors, and develop new products for the target market.4

What About Consumers?

The obvious consumer concern is that less competition might lead to higher prices. Two big deals collapsed in April 2015 due to antitrust opposition by the U.S. Department of Justice, but it can be difficult to predict what will trigger regulatory action.5 In 2013, the DOJ allowed then-bankrupt American Airlines and US Airways to become the world’s biggest airline, capping a dozen years of airline consolidation — which has strengthened the industry but given remaining airlines greater control over routes and pricing.6

In June 2015, potential mergers among the nation’s top health insurers set off alarm bells. California’s insurance commissioner Dave Jones commented, “Further consolidation in the health insurance industry is not a good thing for consumers, employers or medical providers.”7 Even so, Wall Street analysts believe some form of consolidation is likely.8

Overreacting to a merger or acquisition may not be wise, but you might monitor the business performance of companies or industries in which you have an interest. Though the current M&A boom won’t last forever, it could continue as long as companies have cash, interest rates are low, and stock values are high.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments offering the potential for higher rates of return also involve higher risk.

1) The Wall Street Journal, March 31, 2015
2) MarketWatch, April 8, 2015
3–4, 9) The Economist, April 18, 2015
5) Barron’s, May 1, 2015
6) Bloomberg News, June 16, 2015
7) Los Angeles Times, June 17, 2015
8) The Wall Street Journal, June 16, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

New Flexibility for College Savings New investment flexibility for 529 plans and how these plans may help you accumulate savings for higher education costs.

The steady rise in the cost of a college education has slowed somewhat during the past two years. At public four-year schools, the average inflation-adjusted cost of tuition, fees, room, and board increased just 1.2% in the 2013–14 academic year and 1.0% in 2014–15. At private schools, the increases were 1.8% and 1.6%, respectively.1

That’s good news for families with current or future students. But even so, college is expensive, and the long-term trend suggests that costs may rise at a faster pace in the future (see chart).

Despite the cost, higher education is a valuable investment. College graduates not only earn more than non-graduates but tend to be healthier, more satisfied with their jobs, and more likely to remain employed during tough economic times.2 A strategic savings plan could be a key step toward providing your student with the many benefits of a college diploma.

Section 529 Plans

A Section 529 plan is a state- or college-sponsored program designed to help families accumulate savings for future higher-education costs. These plans have been available since 1996, but legislation passed in December 2014 provided additional investment flexibility that should be welcome to parents and grandparents who use 529 plans to save for their children’s or grandchildren’s college education. Owners of 529 accounts can now change the investment options in their existing plan contributions twice per calendar year instead of just once, allowing them to be more responsive to changing needs, time frames, or market conditions.

The funds in a 529 savings plan accumulate on a tax-deferred basis and can be withdrawn free of federal income tax when used for qualified education expenses at accredited post-secondary schools, such as colleges, universities, community colleges, and certain technical schools. Qualified expenses include tuition, fees, room and board, books, and supplies. Section 529 plans feature high contribution limits (set by each state), and there are no income restrictions for donors.

Each 529 plan has its own rules and restrictions, which can change at any time. As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. The tax implications of a 529 plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents and taxpayers.

Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses — which contain this and other information about the investment options, underlying investments, and the investment company — can be obtained from your financial professional. You should read this material carefully before investing.

1–2) The College Board, 2013–2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Tax Tips for Tying the Knot Some tax issues and other financial considerations to keep in mind when making the transition to married life.

Summer is a popular time for weddings. But no matter when you say “I do,” marriage typically leads to many changes — not only on a personal level but also in your finances. Here are some tax issues and other financial considerations to keep in mind if you or someone you know is making the transition to married life.

Name and address changes. The names and Social Security numbers on your tax return must match Social Security Administration (SSA) records, so report any name change by filing Form SS-5, Application for a Social Security Card. You can download the form on ssa.gov. Notify the IRS of an address change by filing IRS Form 8822. You may also report the change at your local post office.

Beneficiary forms. Update beneficiary forms for life insurance, retirement accounts, and other financial accounts as soon as possible. For some accounts, your current spouse is automatically the beneficiary, but you should still change your forms. (You may have to make specific provisions for any children from a previous marriage.)

Filing status. If you are married as of December 31, you are considered to be married for the whole year for tax purposes. You and your spouse can choose to file your federal income tax returns either jointly or separately each year, so you may want to calculate both ways to determine which one results in the lower tax liability.

Tax withholding. You must give your employer a new W-4 form to change your withholding. You and your spouse’s combined income could move you into a higher tax bracket, but it’s also possible that filing jointly will reduce your tax liability. You may want to use the IRS withholding calculator at irs.gov/Individuals/IRS-Withholding-Calculator. If you are self-employed, recalculate your estimated tax payments.

Affordable Care Act (ACA) issues. If you bought insurance from the Health Insurance Marketplace and received an advance payment of the premium tax credit, report any changes in income or family size to your marketplace. You should also notify the marketplace if you move out of the area covered by your plan.

Marriage is the beginning of a new life on many levels. Taking care of financial details should be the easy part!

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Indexed Annuities: Potential Upside, Protecting the Downside How indexed annuities work and the options that may be available to investors in an indexed annuity contract.

Indexed annuities have become more popular in recent years. This appeal may be due to features that can help protect the principal while also participating in market gains.

That’s an attractive combination, but indexed annuities are complex products and not appropriate for every investor. It’s important to understand how they work and the options you may have if you decide to purchase an indexed annuity contract.

Two Return Rates

Like all annuities, an indexed annuity is a contract with an insurance company that offers an income stream in return for one or more premium payments. Payments may begin right away (immediate annuity) or at a future date (deferred annuity) and are paid over the life of the contract — the owner’s lifetime, the lifetimes of two people, or a specific number of years. Of course, any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

An indexed annuity offers a minimum rate of return (typically 1% to 3%) with a potentially higher rate based on the performance of a specified market index (e.g., the S&P 500). If the market has a down year, you would receive at least the minimum return (contingent upon holding the annuity until the end of the contractual term). If the market has an up year, you would receive a higher return, calculated in one or more of the following ways, based on the performance of the index.

Participation rate. Determines how much of the index gain will be credited to the annuity. For example, a participation rate of 80% means the annuity would be credited with 80% of the gain experienced by the index.

Spread/margin/asset fee. May be assessed in addition to, or instead of, a participation rate. For example, if the index gained 10% and the spread/margin/asset fee is 2.5%, then the gain in the annuity would be only 7.5%.

Interest-rate cap. The maximum rate of interest the annuity will earn. For example, if the index gained 10% and the cap rate was 6%, the gain in the annuity would be 6%. Index performance generally does not include dividends, and the way in which the performance is measured may vary, depending on the contract (see chart). Participation rates, cap rates, and other fees are set by the insurance company; some companies reserve the right to change these provisions either annually or at the start of each contract term. These types of changes could affect the investment return.

Most annuities have surrender charges that are assessed if the contract owner surrenders the annuity during the early years of the contract. However, some indexed annuities allow withdrawals of up to 10% per year without surrender charges. Of course, any withdrawals will reduce the principal, and withdrawals before the end of an index period will receive no interest for that period. Early withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty.

Like all annuity contracts, indexed annuities have rules, restrictions, and expenses. Depending on the guarantees of the issuing company, it may be possible to lose money with this type of investment. Be sure to review the contract carefully before deciding whether to invest.

The S&P 500 index is an unmanaged group of securities that is widely recognized as representative of the U.S. stock market in general. You cannot invest directly in any index and do not actually own any shares of an index. Past performance is no guarantee of future results.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Understanding the Gift Tax It’s important to understand gift tax provisions in order to take advantage of the exemption and possibly eliminate or reduce potential tax liability.

You may have wondered whether the gift tax applies to any gifts you have made or plan to make. The good news is that the American Taxpayer Relief Act of 2012 set a permanent exemption for gift and estate taxes at a high-enough level ($5 million, indexed annually for inflation) that relatively few gifts should be subject to the tax.

Even so, it’s important to understand the gift tax provisions in order to take advantage of the exemption and possibly eliminate or reduce your tax liability.

Annual Exclusion

In 2015, you can give up to $14,000 ($28,000 for a married couple) in cash or certain types of property, including income-producing stocks and bonds, to as many people as you wish without any gift tax liability. Certain gifts are not subject to the annual limit, including gifts to your spouse (as long as he or she is a U.S. citizen), donations to qualifying charitable organizations, and payments of tuition or medical expenses on behalf of another person that are paid directly to the educational or medical institution.

For example, if a grandparent wants to help with a grandchild’s education at a level above the annual exclusion amount, it might be more tax effective to pay the school directly rather than give money to the student or his or her parents.

Lifetime Exemption

A lifetime exemption applies to federal estate and gift taxes combined. For estates of those who die in 2015, the exemption is $5.43 million (up to $10.86 million for a married couple). Any amount applied toward your lifetime gift tax exemption would reduce the exemption available for estate taxes. Both the annual exclusion and the lifetime exemption are indexed annually for inflation.

For gifts above the annual exclusion amount, you must file a federal gift tax return (Form 709) in order to apply the lifetime exemption to the gift. You may also have to file a return for certain types of gifts below the annual exclusion. Be sure to consult a tax professional before taking any specific action.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Factors That Influence Hiring Decisions Some signs that it might be time for small business owners to hire extra help, and the related costs.

In early 2015, an index that measures the hiring intentions of small businesses rose to its highest level in seven years.1 About 90% of the U.S. workforce is employed at businesses with 20 or fewer employees, so rising employer optimism is good news for the U.S. job market and the broader economy.2

Fortunately, successful small businesses are likely to continue providing employment opportunities in the years to come.

It’s exciting to discover an opportunity to expand the size or scope of your business, and sometimes extra help is needed to make that happen. But how do you know whether your company is really ready to add new employees?

Here are a few signs that it may be time to hire.

Customer demand for your company’s goods or services is steadily increasing. It may take some time to confirm that growth is consistent and not a seasonal or temporary surge.

You (and/or your staff) can no longer handle critical work in a timely manner, and customer service is suffering.

You regularly pay current employees a significant amount of overtime.

You would like to act on attractive growth opportunities, such as opening a new location.

A person (or people) with a particular skill set is needed to help develop a new product or add to your menu of services.

Consider the Costs

You may need to invest a fair amount of time and money to build a good team. Adding a salary can be substantial by itself. However, providing common benefits such as health and dental plans, disability coverage, and life insurance adds to the cost. In December 2014, the average employer cost for each full-time civilian worker was $31.32 per hour ($21.72 for wages and $9.60 for benefits).3

There may be additional expenses associated with recruiting and screening applicants, training new workers, purchasing workers’ compensation insurance, and complying with any federal and state regulations. It’s important to research the possible cost to implement requirements that apply specifically to your area and/or industry.

In fact, you may want to consult an accountant to help determine whether you can afford to hire extra help.

1–2) Gallup, 2015, 2014
3) U.S. Bureau of Labor Statistics, 2014–2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.