By Liz Hoffman
Avago Technologies Ltd.'s pending takeover of Broadcom Corp.
taps an arcane tax structure that has being dusted off amid a rise
in cross-border mergers.
Avago said it is prepared to offer Broadcom shareholders special
partnership units that would defer any taxes triggered by the $37
billion tie-up, which was announced Thursday. The cross-border
nature of the deal--Avago is based in Singapore, while Broadcom is
in California--might otherwise generate tax bills for Broadcom
investors.
The partnership arrangement would give those
shareholders--including Broadcom's two co-founders, who
collectively own about 8.6% of the company--flexibility in deciding
when to take their tax hit. Broadcom negotiated for the partnership
units with the founders in mind, said a person familiar with the
deal.
At issue is the relative size of the two companies, experts say.
Stock mergers of two U.S. companies are typically tax-free to
shareholders. But under Internal Revenue Service rules that govern
cross-border mergers, if Broadcom is larger than Avago by the time
the deal closes, the transaction could be taxable to Broadcom's
U.S. shareholders, though the IRS could issue a waiver.
As of Tuesday's close, before The Wall Street Journal first
reported the negotiations, Avago had a market value of $34 billion,
while Broadcom had a market value of $28 billion. But by Thursday
trading, the gap had narrowed, with Avago worth about $36.7 billion
and Broadcom worth about $34.6 billion.
The issue arose several times last year, when overseas deals
known as inversions were in vogue. Those deals, in which a U.S.
acquirer buys a foreign target and redomiciles into a lower-tax
venue, generally prompted taxes for the U.S. shareholders, often
without generating much, if any, cash to cover the bill.
Indeed, the special partnership units under consideration in the
Avago-Broadcom deal were offered to shareholders of Burger King
Worldwide Inc. and Tim Hortons Inc. in the two restaurant chains'
2014 merger, an inversion in which the combined entity domiciled in
lower-tax Canada.
With Avago and Broadcom, the partnership units, which would not
be publicly traded, are a backup plan should the IRS deem the
transaction taxable, Avago said. If that happens, Broadcom
investors could still choose to receive a mix of common stock and
cash and owe taxes immediately on their gains. Or they could elect
to receive partnership units and defer those payments until they
convert the units to Avago common stock, which they couldn't do for
at least a year.
The setup can enable "tax-free treatment, albeit at the cost of
holding an illiquid, quirky security," independent tax expert
Robert Willens said in an email.
The deferral could make a big difference to Broadcom's
co-founders, Henry Nicholas and Henry Samueli, who own shares worth
about $3 billion at Broadcom's current price.
Deferrals enable taxpayers to time their hit, for example to
offset future losses, or to put the money to work in
investments.
"Deferral is everything," said Robert Holo, a tax partner at law
firm Simpson Thacher & Bartlett LLP who isn't involved in the
deal.
Broadcom doesn't expect most of its investors would choose to
take the units, the person familiar with the deal said. For
example, mutual funds--which own about 25% of Broadcom's stock,
according to FactSet--are typically judged by their pretax
performance and thus are unlikely to try to minimize or defer
taxes, experts say.
The Burger King deal also involved big inside shareholders. In
the fast-food tie-up, 3G Capital Partners LP owned about 70% of
Burger King and would have owed taxes on the gains when the Tim
Hortons acquisition closed, but for the partnership units.
Write to Liz Hoffman at liz.hoffman@wsj.com
Access Investor Kit for Broadcom Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US1113201073
Subscribe to WSJ: http://online.wsj.com?mod=djnwires