The following article is adapted and reprinted from the M&A Tax Report, Vol. 8, No. 8, March 2000, Panel Publishers, New York, NY.
MORE SPINS AND SPIN DOCTORING
By Robert W. Wood
Only a few weeks ago, it seems, we could report on a goodly number of spins. See Wood, "Further Spinoff Thoughts, This Time Dun & Bradstreet!" Vol. 8, No. 7, The M&A Tax Report, February 2000, p. 5. In the intervening weeks, yet another good slate of spins is in the offing. Deluxe Corp., an aging St. Paul, Minnesota company with a market cap of $2 billion (you should recognize the name from all those printed checks they make), announced plans to split into two companies, taking its electronic payment and technology businesses public. See Deogun, "Deluxe Intents to Split Its Operations, Take Two Technology Businesses Public," Wall Street Journal, January 31, 2000, p. C22.
There almost seems to be a built-in (and highly fashionable) business purpose laid out on the table, with the two electronic payment and information technology units scheduled to be combined into a new publicly traded entity called (you guessed it), eFunds Corp. Deluxe plans an IPO for 10% or 15% of eFunds, followed by a split-off. Existing Deluxe shareholders will be offered the chance to swap their Deluxe stock for eFunds shares (will those be called eShares?).
The split-off is subject to a favorable IRS ruling, a ruling that, based on what I know, should be a slam dunk. Faced with sagging share prices, who wouldn't want to spinoff or split-off some ebusiness to generate a higher eshare price?
Across the Canadian border, BCE, Inc., Canada's biggest telecommunications company, announced plans to spinoff a 37% stake in Nortel Networks Corp., the high-flying telecommunications equipment maker. The idea is to boost BCE's share price and broaden ownership of Nortel. See Chipello, "BCE Planning to Spin Off 37 Percent Interest in Nortel Networks," Wall Street Journal, January 27, 2000, p. B10. Predictably, the transaction is subject to favorable tax treatment, so that BCE shareholders will not experience gain until they dispose of their BCE stock. See Morrison, "BCE to Spin Off Nortel Stake," Financial Times, January 27, 2000, p. 22.
And in England, Peninsula & Oriental Steam Navigation Co. is spinning off its fast-growing cruise unit. Prada, "P&O to Spin Off Its Cruise Unit, Plans London, Big Board Listings," Wall Street Journal, February 4, 2000, p. A12. See also Jowit, "P&O to Split Off Cruise Business," Financial Times, February 4, 2000, p. 23. As if the latest activity was not enough in the U.S., a recent review of European equity issuance suggests that, as the Financial Times put it, high-tech spins are the "flavour of the year." Although not always used in its technical Section 355 sense, the notion of high-tech spinoffs and IPOs is literally rife in European markets. See Ostrovsky, "High-Tech Spin-Offs the Flavour of the Year," Financial Times, January 17, 2000, p. 23.
Business Purpose Supplied
As if these deals weren't enough, Chicago-based Bell & Howell, better known for its film projection equipment and other stodgy operations, announced plans to spinoff its information and publishing unit into a separate company. As we've heard so many times before, the spinoff is to "liberate" the faster growing information business, including internet and software products based on an academic publication database. See Bowe, "Bell & Howell Spin-off," Financial Times, January 13, 2000, p. 14.
From a business purpose perspective, the Bell & Howell transaction seems yet another obvious one to present to the Service (if a ruling is being obtained). As the Wall Street Journal put it, Bell & Howell was simply "frustrated" by the market valuation of its internet oriented operations. The solution: split-off the web businesses so that they can be really fairly valued (presumably meaning valued at an unfairly high price!). See Miller, "Bell & Howell to Split Into Two Firms to Counter Valuation of Web Business," Wall Street Journal, January 13, 2000, p. B20.
There is even a proposal by the National Association of Securities Dealers, of all things, to spinoff NASDAQ to certain groups of the market's participants through a two-step private placement. See Ewing, "NASD Board Approves Plan for $1 Billion Nasdaq Spinoff," Wall Street Journal, January 5, 2000, p. C21.
On the slower side, Kansas City Southern Industries, Inc. announced that the planned spinoff of Stillwell Financial would be delayed because the SEC was reviewing financial reporting practices regarding its 82% owned subsidiary, Janus Capital Corp. Readers may remember that Kansas City Southern Industries had announced plans way back in 1998 to spinoff its financial services subsidiary. The deed was delayed until 1999 because of tax complications. But, in 1999 the company did receive a favorable ruling from the IRS to go ahead with the spin on a tax-free basis. Now, another agency (the SEC, surely less of a normal problem for spinoffs than the IRS!) has delayed the matter again. See Lucchetti, "Stillwell Financial Sees More Delays on Spinoff Plans," Wall Street Journal, January 11, 2000, p. C27.
Applied Power, an industrial and electronics company based in Wisconsin and hearkening back to the early part of the twentieth century, is spinning off its higher-growth electronics business. Why? To boost shareholder value, why else. This old line industrial company has newer businesses making enclosures for electronic equipment (essentially big boxes for computer servers, memory systems, etc.). This higher-growth and arguably sexier industry merits a separate company, analysts say. While there seems a built-in business purpose here, too, analysts apparently are expecting a sale of the older line operations, with the stock price rising about 20% in the last six months, partly in anticipation of a sale of the industrial components. That raises interesting questions about the ability to obtain a ruling. Still, the press reports suggests that a tax-free spinoff (which surely would be available here), will be approved. See Deogun, "Applied Power Says it Will Spin Off Its Higher-Growth Electronics Business," Wall Street Journal, January 27, 2000, p. C23.
Anti-Morris Trust Concern
Amidst all this spinning (whirling dervish-like past the millenium mark), it is worthwhile to step back and look at what is still controversial in Section 355. Consider Section 355(e) applying to a distribution that is part of a plan or series of related transactions pursuant to which an acquisition of a 50% or greater ownership interest in the distributing or controlled corporation occurs. The statute presumed this evil plan exists if the 50% acquisition occurs within two years on either side of the distribution (a kind of metaphorical purgatory window).
The IRS addressed the Section 355(e) concept in regulations in August of 1999, setting forth proposed regulations that, at least it can be said, provided several methods for rebutting the presumption. Unfortunately, these methods of rebutting the presumption are apparently intended to be exclusive. We'll cover more about the anti-Morris Trust regulations and the comments that have weighed in for and against them in a future issue. For now, though, it is well to remember that Section 355(e) had a rather defined and perhaps unwarranted purpose. Before Section 355(e)-enacted as part of the inaptly named Taxpayer Relief Act of 1997, a tax-free spinoff could be combined with a tax-free reorganization to rid a target corporation of a trade or business that was unwanted by the acquirer. The case establishing this proposition, of course, was Commissioner v. Morris Trust, 367 F.2d 794 (4th Cir. 1966).
Section 355(e)-hardly a taxpayer relief measure in anyone's book-was enacted to prevent the avoidance of corporate level gain in transactions that Congress thought resembled the disposition of a business segment. The distributing company must recognize gain on the distribution of controlled stock that otherwise qualifies under Section 355(a) if one or more persons acquires stock representing a 50% or greater interest in either the controlled or distributing corporation pursuant to-and here comes the sticky wicket-a plan (or series of related distributions) on the date of the distribution.
More about the August 1999 proposed regulations and current thinking on this state of affairs in a future issue. For now, though, take some solace in the fact that the march of the spins keeps coming, wave after wave of them, seemingly unabated.
More Spins and Spin Doctoring, Vol. 8, No. 8, M&A Tax Report (March 2000), p. 6.