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 The $120 billion merger, announced last week, comes less than a
month after drug maker Pfizer Inc said it would use its $160 billion
acquisition of Allergan Plc as a way to cut its taxes. It
underscores the growing use of mergers and acquisitions as a way to
slash corporate America's tax bill.
"The whole structure of this is very, very tax efficient and one of
the reasons we are doing it this way, so very beneficial from that
standpoint to the shareholders," DuPont CEO Ed Breen told analysts
on Friday. "When I looked at every other strategic option to DuPont,
there was nothing that came close to this."
Unlike the Pfizer-Allergan deal, where the savings are the result of
Pfizer redomiciling to Ireland where Allergan is based in a
so-called inversion, the Dow-DuPont tax savings hinge on their
transaction being structured as a merger of equals, a rare event
that requires companies of the same size and scope willing to
negotiate it, according to tax experts. Both companies are now
valued at about $60 billion each.
"It is fairly rare," said Robert Willens, a corporate tax and
accounting consultant. It's unusual for two companies of roughly
equal size in the same industry to negotiate such a deal, he said.
Typically, companies that have been through a change of control are
liable to pay capital gains taxes on subsequent spin-offs, under
section 355 of the U.S. Internal Revenue Code. If both companies,
however, do not formally undergo a change of control, the spin-offs
can be tax-free.
After their merger, Dow and DuPont plan to create three
publicly-traded businesses, focusing on agriculture, materials and
specialty products. They plan to argue that no change of control
will have occurred by structuring their initial deal as a merger of
equals. Bolstering their view that a change of control has not
occurred is that the two companies have many shareholders in common.
Vanguard Group Inc, State Street Global Advisors, Capital World
Investors and BlackRock Inc are, in that order, the top holders of
both companies' stock.
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The companies haven't disclosed estimates for tax savings. People
familiar with the deal said the savings will far exceed the $3
billion in annual cost synergies that the companies expect.
Tax experts say there is some, albeit limited precedent to this. The
most famous case where this deal structure was used was the 2007
merger of drug distributors AmerisourceBergen Corp and Kindred
Healthcare Inc, which the companies used to then spin off their
institutional pharmacy businesses.
William Curry, Dow's chief tax officer, played a key role in
structuring the tax aspects of the deal with DuPont, according to
the sources. Earlier this year, he orchestrated the separation of a
portion of Dow's century-old chlorine business and sale to Olin Corp
in a tax-efficient deal worth $5 billion.
Dow and DuPont declined to comment on the tax aspects of their deal.
(This story corrects DuPont CEO's surname to Breen from Breene in
paragraph 3)
(Reporting by Greg Roumeliotis and Mike Stone in New York; Editing
by Carmel Crimmins and John Pickering)
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