Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Another win for M&A bankers, another loss for the taxman -- and this time, we're not talking about inversions.

Shire on Monday announced a $32 billion purchase of U.S. hemophilia drugmaker Baxalta, notching the biggest deal of the still-new year after a record 2015. The transaction, in the making since at least August, was held up over the issue of price (Baxalta wanted more) and the tax consequences of paying for part of the deal in cash. 

Off to the Races
Shire's $32 billion purchase of Baxalta is the biggest deal yet in what is set to be a busy year for dealmaking.
Source: Bloomberg

But where there's a will, there's a way. And with precedents to point to, and a U.S. tax code full of loopholes and allowances for mitigating factors, the companies are confident they've found a way. 

The issue stems from the fact that Baxalta was spun off tax-free from hospital-supply company Baxter International only about six months ago. There are rules governing spinoffs over the first few years of their existence to prevent companies from using the tactic as a way to funnel cash to shareholders. On the face of it, those rules made it look like adding cash to any takeover offer for Baxalta could be problematic and put the tax-free nature of that spinoff in jeopardy. Shire needed to sweeten the deal with cash because Baxalta rejected an all-stock proposal that would have skirted the tax issue.

Here's why Shire may be able to get around its tax problems: It didn't hold conversations with Baxter about a possible combination with Baxalta ahead of the spinoff; Baxter had a legitimate business reason for doing the Baxalta spinoff; and Baxter is a publicly traded and widely-held company.

If Baxter wasn't aware of Shire's interest and wasn't actively looking to sell Baxalta, it's harder to argue the spinoff was all part of some elaborate master plan to hoodwink the IRS. Rather, the point of the split was to allow the drug business (Baxalta) and the medical-products business (Baxter) to focus on what they do best and trade at valuations appropriate for their different risk profiles. And because shareholders can freely sell shares of Baxter -- and Baxalta for that matter -- some of them were probably cashing out anyway.  

Shire's tax win isn't yet a guarantee. As Bank of America analyst Graham Parry noted,  the company doesn't have a private-letter ruling from the IRS explicitly confirming the Baxalta spinoff would stay tax-free and may not get much clarity from the agency until after year-end tax filings, or as late as 2017. 

But it isn't the first company to go down this path. In 2006, Cendant Corp. (the predecessor of car-rental company Avis Budget Group) spun off its Realogy real-estate division. Realogy then agreed to sell itself just a few months later in an all-cash deal with private-equity firm Apollo. Motorola spun off Motorola Mobility in January 2011 and by August of that year, Google had pounced with an all-cash offer.

For now, it looks like there are enough factors working in Shire's favor that it should be able to pull this deal off, according to tax consultant Robert Willens and Laurence Bambino of Shearman & Sterling. Whether it's a smart strategic deal for Shire is another question.   

Curbed Enthusiasm
Shire shares have tumbled almost 40 percent since the company initially approached Baxalta.
Source: Bloomberg

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net