Tax Inversion Critics of Burger King Telling a Whopper
Contrary to news, tax inversions rarely drive M&A deals. That particularly applies to Burger King Corp.’s proposed $11 billion buyout of Tim Hortons Inc.
26 August 2014
Contrary to the recent controversial news coverage, tax inversions very rarely drive M&A deals. That particularly applies to Burger King Corp.’s proposed $11 billion buyout of Ontario-based Tim Hortons Inc. Some critics are even claiming Burger King’s deal (including its plans to relocate to Canada) is just about exploiting the lower tax rate there.
Now that theory is great, except that it really makes no sense. The tax inversion accusation is a mere red herring: This deal is a merger of two equals, and it’s clearly strategic in nature. These inversion-based deals, while admittedly high-profile and doubling in frequency, are still but a tiny percentage of the M&A activity we track. They represent something like 0.1 percent of the regular deals on the market, or one of out of 1,000.
Some of the inversions are also just by-products of decent strategic M&A and not solely driven by the tax savings. Yes, in some cases, a large American company may sneak off to do a deal with a smaller offshore firm, in, say, Ireland, to get a tax break. But that is actually rare, and it’s unfair to put the Burger King-Hortons deal in that boat.
A Fast-Food Colossus in the Making
The Burger King-Tim Hortons deal actually isn’t about taxes. It’s about getting one up on the fast-food competition, such as McDonald’s Corp. Moving to Canada (the largest market for the combined company) and getting a tax break is certainly a by-product of the deal — but it’s not a core reason for it.
The union of Burger King and Tim Hortons will combine a hamburger giant with a coffee and donut juggernaut. They’re two really good brands that can cross-sell, and they need scale and scope. In fact, if this deal closes, says USA Today, it will create “the world’s third largest fast-food and fast-casual restaurant company,” able to boast it has 18,000 outlets in 100 countries, and $22 billion in system sales.
Tax Rates a M&A Red Herring?
Tax inversion is taking a big public relations hit these days. As a Chicago Tribune article notes, lately, there have been a handful of deals that also involved inversions.
In fact, drug store giant Walgreen Co. got so much heat from activists, unions, and politicians (including Barack Obama) it shelved a planned decision to reincorporate in Europe. By the time Walgreen got around to trying an inversion, public opinion was not favorable. Obama even called it an “unpatriotic tax loophole,” as the Tribune notes.
But this is overreaction. The current M&A momentum on display shows that there are companies with extra cash to spend that want to increase their market share. That’s it. The healthy M&A environment existed before inversion began to be talked about and will continue despite it.
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Matt Porzio joined Intralinks in 2003. As SVP Marketing & Strategic Business Development, he is responsible for managing and driving the strategic direction for Intralinks Dealspace including virtual data room and full deal lifecycle solutions for the M&A, Private Equity, Advisory, Corporate Development and Restructuring communities. Before joining Intralinks, he was a senior associate at Metzler, a German advisory firm, focused on cross-border M&A transactions.