Is Tax Minimization Driving Corporate Takeovers?

There is a tax angle behind these three blue chips' acquisition plans

May 23, 2014 at 10:15AM
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The S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) were up 0.22% and 0.25%, respectively, at 10:15 a.m. EDT.

It's entirely normal that companies should take taxes into consideration in the normal course of business, which may include evaluating potential acquisition targets. The question is whether tax considerations might actually drive major deals if the distortions between tax regimes are sufficiently large, and whether that is healthy. Recent headlines top stories concerning the acquisition plans of three blue-chip U.S. companies -- Apple (NASDAQ:AAPL), General Electric (NYSE:GE), and Pfizer (NYSE:PFE)-- all of which have an important tax component (or may have, in the case of Apple).

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Let's begin with Apple. I wasn't the only commentator to suggest that the $3.2 billion price tag it's willing to pay for high-end headphones manufacturer  and music streamer Beats Electronics looks pretty steep, but perhaps I was missing part of the picture.

In a blog post on Forbes' website, Joe Harpaz, who heads the corporate market for the tax and accounting business at Thomson Reuters, wrote that Apple may be able to pay for the deal using its enormous foreign cash pile -- effectively lowering the company's tax liability:

Beats Electronics Holding Limited was established in 2012, giving Beats tax residency in Ireland. Depending upon how a potential acquisition is structured, this could allow Apple to make the purchase with foreign funds that have not been repatriated to the U.S...

Following the rough tax math of a foreign acquisition, Apple's $3.2 billion bid would really be more like $2 billion if the transaction could take place in Ireland. Considering the fact that Apple currently has approximately $54 billion in cash parked offshore, the benefits of doing a foreign acquisition over repatriating that cash back into the U.S. become even more apparent.

In other news this morning, industrial-financial concern General Electric has extended the deadline on its $16.9 billion offer for the energy business of French conglomerate Alstom. GE appears willing to walk through fire in negotiating with the ornery French government in order to complete the transaction. Part of the attraction: the opportunity to tap the $57 billion in cash it has amassed abroad to pay for the deal.

Finally, the Financial Times reported yesterday that major investors are urging AstraZeneca to sit down with Pfizer for earnest discussions regarding the latter's acquisition offer. Pfizer last weekend disclosed a GBP 55 per-share "final" offer for its rival drugmaker, which was promptly rejected.

Pfizer's takeover offer is the most egregious example of tax policy driving an acquisition, as the deal is premised on minimizing taxes on multiple levels, not least of which is an "inversion" that would allow Pfizer to switch its tax domicile to the U.K. (In order to the do this, AstraZeneca shareholders need to end up owning at least 20% of the combined company, thus impacting the price Pfizer is willing to pay.)

The fact that the U.S. taxes companies on worldwide income is instrumental in these (and other) transactions, as it provides a strong incentive for companies not to repatriate their foreign cash and instead find other uses for it abroad. The U.S. is the only country among the Group of Seven nations that implements worldwide, rather than territorial, taxation; perhaps it's time lawmakers revisited this policy.

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