Coverage: Back to dealing
This weekend brought the announcement of a couple of big deals in the works. One that is surely going to get some press is the announcement that Burger King is looking to buy Canada’s Tim Hortons in a deal that would involve a tax inversion.
The Wall Street Journal broke the news in a story by Liz Hoffman and Dana Mattioli:
Burger King Worldwide Inc. is in talks to buy Canadian coffee-and-doughnut chain Tim Hortons Inc., a deal that would be structured as a so-called tax inversion and move the hamburger seller’s base to Canada, according to people familiar with the matter.
The two sides are working on a deal that would create a new holding company, one of the people said, adding that the takeover would create the third-largest quick-service restaurant provider in the world.
One of the people said a deal between the two companies could be struck soon, though additional details on timing couldn’t be learned. Together the restaurant companies have a market value of about $18 billion.
By moving to a lower-tax jurisdiction, inversion deals enable companies to save money on foreign earnings and cash stowed abroad, and in some cases lower their overall corporate rate.
Such deals threaten to deplete U.S. government coffers, and they have drawn stiff opposition in Washington. Efforts are under way to limit their use.
After a tide of tax-inversion deals—including AbbVie Inc.’s purchase of Ireland’s Shire PLC and Medtronic Inc.’s agreement to buy Ireland’s Covidien PLC, with other deals expected in the coming months—the White House called on Congress to take steps to prevent companies from pursuing inversions.
While the U.S. government is trying to decide what to do about deals being done for tax purposes, other firms are continuing to seek combinations. Andrew Pollack and Michael J. de la Merced reporting for The New York Times that Roche plans to buy InterMune:
The Swiss drug maker Roche agreed on Sunday to buy InterMune — which sells a drug to treat a deadly lung disease — for $8.3 billion, as pharmaceutical companies continue to seek new products to bolster their offerings.
The price, $74 a share, represents a 38 percent premium to InterMune’s closing price on Friday and a 63 percent premium to the price on Aug.12, before news reports that InterMune might be acquired.
The acquisition was announced amid a flurry of pharmaceutical deals and attempted deals. About $87 billion in pharmaceutical acquisitions were made in the first half of this year, eclipsing the total for all of 2013, according to Evaluate, a research company. The total for the first half does not include the $54 billion acquisition of Shire by AbbVie, which was announced in July.
InterMune, based in Brisbane, Calif., has one product on the market: a drug called pirfenidone to treat idiopathic pulmonary fibrosis, a fatal scarring of the lungs.
The Financial Times reported in a story by Andrew Ward and Arash Massoudi that the InterMune deal was just one of many for Roche:
Roche said the transaction would be neutral to earnings in 2015 and accretive from 2016 onwards. Daniel O’Day, chief operating officer of Roche’s pharmaceuticals business, was “very confident” the deal offered good value to the Swiss company’s shareholders and said there could be more bolt-on acquisitions ahead.
The InterMune agreement follows deals worth up to $2.5bn in the past three months for Roche with the acquisitions of Seragon Pharmaceuticals of the US, Santaris of Denmark and Genia of the US.
Roche generated nearly $19bn of free cash flow last year and is forecast by analysts to be in a net cash position by 2015.
The company has also been linked with a potential $10bn deal to acquire the remainder of Chugai, Japan’s third-largest drugmaker, in which Roche already controls 61.5 per cent. People close to the situation have previously said Roche was close to a deal with Chugai, but one person has since warned that such a transaction may not happen for weeks.
These two deals will be interesting to follow since the latter is unlikely to get attention from anyone outside the drug sector. On the other hand, the Burger King move is likely to yield many articles.
Writing for The New York Times’ Upshot column N. Gregory Mankiw, argues that vilifying the corporations isn’t the right response:
Yet demonizing the companies and their executives is the wrong response. A corporate chief who arranges a merger that increases the company’s after-tax profit is doing his or her job. To forgo that opportunity would be failing to act as a responsible fiduciary for shareholders.
Of course, we all have a responsibility to pay what we owe in taxes. But no one has a responsibility to pay more.
The great 20th-century jurist Learned Hand— who, by the way, has one of the best names in legal history — expressed the principle this way: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.”
If tax inversions are a problem, as arguably they are, the blame lies not with business leaders who are doing their best to do their jobs, but rather with the lawmakers who have failed to do the same. The writers of the tax code have given us a system that is deeply flawed in many ways, especially as it applies to businesses.
And overhauling the corporate tax code isn’t likely to happen anytime soon, particularly given our current political climate. Instead lawmakers will likely focus on companies looking to expand through acquisitions. Holding back deals might be good for the short-term Treasury budget, but it will be hard to quantify the losses in innovation, new developments and other opportunity costs.