Shire's Baxalta acquisition highlights post-spin-off tax issues
INSIGHT ARTICLE |
Medical device maker Baxter spun off over 80 percent of drug-maker Baxalta in July 2015. The spin-off was designed to be tax-free. A post-spin-off acquisition of Baxalta could have jeopardized its tax-free status. As a result, Shire, Baxalta and Baxter needed to focus on tax issues when considering Shire’s proposal to acquire Baxalta.
If the Shire acquisition was part of a plan in place at the time of the Baxalta spin-off, the July 2015 spin-off distribution of Baxalta could be made taxable to Baxter. Shire reportedly waited until after the announced spin-off to engage Baxalta in negotiations; a favorable fact for maintaining tax-free status.
Shire’s original all-stock offer carried less tax risk but was less attractive financially. The inclusion of about $13 billion of cash (40 percent of the total consideration) increased potential tax risk under the device rule; a rule that would impose tax on both Baxter and its shareholders if the spin-off was principally a device for distributing corporate earnings to shareholders. This risk needed to be considered along with the business purpose motivating the spin-off, separating the medical device and drug businesses. In January 2016, Shire, Baxalta and Baxter decided the acquisition would go forward, contingent on the receipt of appropriate tax opinions addressing the previous spin-off.
The Baxalta deal exemplifies the tax advantages that can result from a spin-off. It also demonstrates that an acquisition soon after a spin-off raises tax issues, but may be feasible in certain situations.