All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

US conditions peak for tax-free M&A

fotoflexer-empirestate.jpg

The US M&A market is primed for use of a bespoke, tax-free sales structure known as a reverse morris trust (RMT). However, the time it can to secure a favourable ruling from the Internal Revenue Service (IRS) complicates taking advantage of the technique.

RMTs’ numerous transaction steps make them difficult to complete, and they are only applicable in limited circumstances, but a combination of market conditions mean more corporations are looking at RMTs as a serious possibility.

fotoflexer-robertprofusek.jpg

“A lot of people are looking at these right now,” said Robert Profusek ( pictured left), head of Jones Day’s M&A practice.

Firstly, predictions that 2012 would be a bumper year for spinoffs have proved accurate. Spinoffs are essentially tax-efficient intra-company reshuffles that increase shareholder value, but they are also the first step of a RMT.

Reading between the lines, their announcement is an invitation to the market. “It’s a classic case of signalling to the world ‘if you are interested, let us know’,” said Profusek.

After the spinoff, the two major steps to complete a RMT are a smaller, external company merges with the spin-co and the resulting merged company issues more than 50% of its shares to the spin-co’s original parent.

The second reason why the market is ripe for RMTs is shareholder activism. The growing power of activist investors and their preference for so-called pure plays has pushed boards to separate different business groups. Also driving the push towards pure plays is the equity markets not accurately valuing combined companies on a combined multiple-basis.

“Since the global financial crisis, investors aren’t getting the values right,” said another US M&A partner. Finally, low interest rates in the US and Asia means financing for these deals is cheap.

Some companies have shown a penchant for RMTs, most notably Procter & Gamble. The consumer goods company used the structure to sell part of its Folgers coffee unit in 2008, and planned to do the same for its sale of Pringles before the other party, Diamond Foods, withdrew after becoming the subject of an accounting fraud investigation.

More recently Georgia Gulf and PPG Industries combined via a RMT in a $2.1 billion deal, and there is mounting speculation that Liberty Media’s proposed acquisition of Sirius XM will also use the model.

RMT explained

Perhaps the biggest difficulty of completing a RMT is finding a buyer that is smaller than the target. The size differential means the spin-co is deemed the buyer under Internal Revenue Service (IRS) rules, and its original parent company and shareholders do not pay capital gains tax.

Despite retaining fewer shares in the merged entity, the external company retains management and board control. But the process is a strain on their share value, shareholder confidence, and post-closing activities. “Integrating a target that is bigger than you can be difficult in execution,” said the US partner.

Since 2001, when the IRS released guidelines clarifying when spinoffs, split-offs and RMTs will be tax-free, it is not strictly necessary to obtain a tax ruling before using one of these deal structures.

This is helpful as an IRS ruling can take between six to nine months. But the extent of IRS requirements, and the tax consequences for spin-co’s parent and shareholders if they are not satisfied, means many err on the side of caution.

“Most of the major deals are done based upon a private letter ruling from the IRS. So many of these transactions are conditioned upon receipt of a favourable IRS ruling,” said a New York-based tax partner.

Read this story on IFLR.com here

more across site & bottom lb ros

More from across our site

Vikas Garg talks to reporter Siqalane Taho about how regulation, technology and the goods and services tax has affected the manufacturing company.
A major shift is underway in tax as the profession transitions from a mostly accounting and finance sector to a hybrid industry that requires significant IT skills, say tax experts.
The Biden administration is about to give $80 billion to the Internal Revenue Service to enhance the tax authority’s enforcement processes and IT systems.
Audi, Porsche, and Kia say their US clients will face higher prices under the Inflation Reduction Act after the legislation axes an important tax credit for electric vehicle production.
This week Brazil’s former President Luiz Inacio Lula da Silva came out in support of uniting Brazil’s consumption taxes into one VAT regime, while the US Senate approved a corporate minimum tax rate.
The Dutch TP decree marks a turn in the Netherlands as the country aligns its tax policies with OECD standards over claims it is a tax haven.
Gorka Echevarria talks to reporter Siqalane Taho about how inflation, e-invoicing and technology are affecting the laser printing firm in a post-COVID world.
Tax directors have called on companies to better secure their data as they generate ever-increasing amounts of information due to greater government scrutiny.
Incoming amendments to the treaty could increase costs on non-resident Indian service providers.
Experts say the proposed minimum tax does not align with the OECD’s pillar two regime and risks other countries pulling out.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree