Wells Fargo Tax Impact on M&A

Tax Policy Outlook – Impact on M&A September 2020

Confidential – For Discussion & General Information Purposes Only

Near-Term Corporate Support in CARES Act – Outlook For Extension is Unclear Massive government stimulus may amount to $10T of fiscal & monetary spending for a $20T economy Overview of Select Corporate-Focused Provisions Within the CARES Act

Total Cost Estimate: $1.7T1

Bonus Depreciation for QIP

 Retroactively corrects technical error in TJCA to allow for immediate deduction for qualified improvement property

Estimated Cost: Part of $24B ‘Other Tax Provisions’

Employee Retention Tax Credit

 Up to $5,000 tax credit for wages paid from 3/13/20 to 12/31/20, applied against social security taxes; potential expansion to make more companies eligible

Estimated Cost: $55B in 2020-21

Payroll Tax Deferral

 Deferral of social security taxes arising from 3/27/20 to 12/31/20; half due in at end of ‘21 and ’22, respectively

Estimated Cost: $351B in 2020-21

NOL Carryback

 Permits losses generated 2018-20 to be carried back up to five years for tax refund; extremely unpopular among democrats

Estimated Cost: $80B in 2020

Interest Expense Deduction

 For 2019-20, interest expense deduction limit increases from 30% to 50% of 2019 or 2020 EBITDA

Estimated Cost: Part of $24B ‘Other Tax Provisions’

Federal Reserve 13(3) Programs

 Backstop for Federal Reserve purchases of investment grade and fallen angel corporate bonds; CBO noted a high probability that programs will be profitable

Estimated Cost: Up to $454B

Source: Congressional Budget Office and the staff of the Joint Committee on Taxation (JCT) filed 4/27/2020, KPMG, Wells Fargo Securities, LLC 1.

On a preliminary basis, CBO and JCT estimate that the CARES Act will increase federal deficits by about $1.7 trillion over the 2020-2030 period

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Biden Tax Proposals Released Before Primaries Provide High Level Outline of Increased Corporate Taxes In December 2019, Biden released a tax proposal perhaps better characterized as a set of aspirations rather than a detailed plan Overview of Select Proposals Within Biden Tax Plan

Total Revenue Est.: $3.7T1

Corporate Income Tax

 Higher corporate tax rates at 28% may be challenging to pass if the economic backdrop is depressed

Estimated Cost: $1,300B

Payroll Tax

 Modifies the current cap on Social Security taxes, effectively increasing personnel costs ~4.9% for every dollar the cap is raised

Estimated Cost: $808B

Capital Gains Tax

 Proposal would tax capital gains as ordinary income for individuals with incomes above $1 million

Estimated Cost: $503B

Global Minimum Tax

 May reduce the deduction for how much CFC income is taxable in the U.S., effectively doubling the minimum tax, while switching from aggregate CFC income to country-by-country analysis

Estimated Cost: $309B

Alternative Minimum Tax

 Initially proposed at 15% (rather than the previous 20%); AMT is generally despised among tax practitioners as it requires duplicative calculations

Estimated Cost: $166B

Passage of Biden’s tax proposals would likely require Democratic control of the White House and Congress – recent polling data indicates this outcome may be increasingly likely Source: Tax Policy Center Urban Institute & Brookings Institution, “An Analysis of Former Vice President Biden’s Tax Proposals,” March 5, 2020, including proposals as of February 23, 2020 1.

Estimated cost details over a 10-year period based on conventional method are adapted from “Details and Analysis of Former Vice President Biden’s Tax Proposals,” April 29, 2020

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Illustrative Implications of Higher Capital Gains Tax Rates Owners may Drive Business Success but Generate Less Sale Now

($ in Millions)

Sale in 5 Years

Commentary

EBITDA Exit Multiple Proceeds from Sale

$100 12.0x $1,200

$161 12.0x $1,933

Annual EBITDA growth of 10%

Capital Gains Tax Rate Taxes Paid Net Proceeds

23.8% 286 $914

39.6% 765 $1,167

Capital Gains Rate = Personal Income Rate

$914

$725

10% discount rate for time value of money

Present Value

($190)

Value Gain / (Loss) of Holding

Difference of future sale and sale now

(21%)

% upside / (downside)

% Upside / (Downside) Sensitivity of Holding Tax Rates 25.0%

30.0%

35.0%

40.0%

5.0%

(17%)

(22%)

(27%)

(32%)

(38%)

10.0%

+5%

(2%)

(8%)

(15%)

(21%)

15.0%

+31%

+23%

+15%

+7%

(2%)

20.0%

+62%

+52%

+42%

+32%

+22%

Discount Rate

Annual EBITDA Growth

20.0%

Tax Rates 20.0%

25.0%

30.0%

35.0%

40.0%

6.0%

+26%

+18%

+11%

+3%

(5%)

8.0%

+15%

+8%

+1%

(7%)

(14%)

10.0%

+5%

(2%)

(8%)

(15%)

(21%)

12.0%

(4%)

(10%)

(16%)

(22%)

(28%)

Given likelihood of tax increases many businesses are actively exploring ways to return capital to shareholders in 2020 (and 2021 assuming tax changes are not retroactive) Source: Wells Fargo Securities, LLC

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Potential Ways to Get Ahead of the Tax Man

While timelines are tight for a 2020 execution, we are working with various family and managementowned businesses as they explore ways to return capital to shareholders before the end of the year



Change of control sale transaction, either LBO with meaningful shareholder rollover or complete sale to a strategic



Accessing the capital markets, e.g., term loan B or HY issuance, to fund a dividend



Structured minority equity/mezzanine debt raise to fund a dividend



Op co/Prop Co structure that includes 3rd party investment in Prop Co and significant distribution to shareholders

Source: Wells Fargo Securities, LLC

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