This Friday a meeting is scheduled to be held in Hillsboro, Oregon to vote on the proposed merger between Triquent Semiconductor and RF Micro Devices. In a September 3, 2014 article the Oregonian notes “Investors love the deal, which the companies say will save $150 million over its first two years.” Translation – Doing this deal will allow us to fire lots of workers and make a fortune on our stock options.
And as Reuters also reports, most of those firings will likely occur in Oregon because this is really a takeover, not a merger. A big winner will of course be the investment firm advising on the deal, Goldman Sachs. who plans to earn a transaction fee of approximately $25 million.
In reviewing the 484 page proxy statement it appears that the meeting scheduled for Friday is illegal because it has major violations of key SEC proxy rules that specifically require disclosing key financial data to investors. On page 323 the following disclosure is made,and a similar disclosure is made on page 343 indicating Triquest tax data is provided to RF Micro Devices. “(j) RFMD has Made Available to TriQuint accurate and complete copies of all federal and state income Tax Returns of the RFMD Corporations for all Tax years that remain open or are otherwise subject to audit (other than years that remain open solely because of the carry forward of net operating losses or other Tax attributes), and all other RFMD Corporation Returns filed since December 31, 2010.”
Of course the key problem here is that proxy rules are not designed to require insiders to share information among themselves but rather with all investors. What is specifically missing in the SEC disclosure is the amount of accumulated net operating losses being contributed to the new Rocky Holding Inc., the proposed surviving entity. These amounts are substantial and material to both companies financial statements.
What is also clearly happening is what Parish and Company refers to as a “domestic public tax inversion.” Parish & Company did groundbreaking work on tax inversions beginning with the AOL/Time Warner inversion done in 2000. While Pfizer has now put one type of inversion on the public’s radar screen, hedge funds and private equity firms have been doing aggressive tax inversions for more than 15 years. Parish and Company has identified the following types of inversions as follows:
Type 1: Domestic Private to Private: This occurs when a private equity firm does a takeover of a domestic non publicly traded private firm, usually a high tax company firm with domestic markets. Likely inversions include New Seasons Markets, Dave’s Bread and Stumptown Coffee. Note that these can not be confirmed without seeing the private equity firms tax returns.
Type 2: Domestic Public to Private: An example would be a private equity firm taking a public company private such as Silver Lakes recent acquisition of Dell Computer.
Type 3: Domestic Public to Public: Examples here involve two publicly traded domestic firms merging, for example AOL/Time Warner and TD Waterhouse/Ameritrade. The objective here is to have the firm with the large net operating losses acquire the profitable firm and therefore be able to use all the losses at once, rather than confirm to the IRS Section 382 limitations which require them to be amortized over approx 20 years.
This type also includes spinoffs made any public companies such as GE’s spinoff of NBC Universal to Comcast in which they created a phony short term partnership to game tax deductions. Something has to keep those 1,000 people in GE’s corporate tax department busy.
Type 4: International Public to Public: These involve a publicly traded firm such as Eaton merging with Cooper Industries PLC, a foreign publicly traded firm based in a lower taxed jurisdiction. A second example would be Longview Fiber’s acquisition by Brookfield Asset Management of Toronto in 2007. A third example would be Pfizer’s attempt to merge with UK based AstraZeneca.
Type 5: International Public to Private: Examples include TPG buying a publicly traded European Telecom company and taking it private.
Type 6: International Inversion – Private to Private: These include a private equity firm like KKR purchasing a non publicly traded medical equipment foreign firm. The reason Triquent and RF Micro Devices are being rolled into a new entity, Rocky Mountain Holdings, is nothing but a creative attempt to do a domestic public to public inversion and be able to use all the net operating losses immediately, to offset profits and escape the required IRS section 382 loss limitation rules.
Only by revealing the total accumulated net operating losses each is contributing to the deal can investors know and make an informed vote. These tech companies should remember all too well the .com bust, a collapse largely driven by financial engineering involving the excessive issuance of stock options in which a full tax deduction was being taken yet no cost represented on the financial statements.
While some thought options were designed to benefit employees, the real benefit was to company cash flow by eliminating taxes and at the same time not recognizing any expense for the options. If and when the Secretary of the Treasury Jacob Lew and IRS commissioner John Koskinen start enforcing the existing rules on net operating losses, this type of gamesmanship will surely result in a “tax inversion inspired correction.”
That will be good news for companies paying their fair share of taxes, and likely result in higher stock values. Investors should also cheer this, rather than destructive layoffs resulting from management greed and incompetence.
For the financial engineering inspired folks at Goldman, Triquent and RF Micro Devices the future indeed could hold a tax reality driven correction in stock values, especially if Friday’s meeting is cancelled, as it should be.
Disclosure: Parish & Company maintains no material positions in either stock other than passive index funds.