The following article is adapted and reprinted from the M&A Tax Report, Vol. 10, No. 2, September 2001, Panel Publishers, New York, NY.


By Robert W. Wood

Okay, I'll be accused of attacking (or parroting — forbid the thought!) Lee Shepherd too much in this issue. But apart from a number of spins on which I must report, we need to mention in our ongoing accolade of the spinoff techniques that there is also some Lee Shepherding to be done, too.

First, here is the spin news. Hynex Semiconductor of South Korea, formerly the far better known and better-named Hyundai Electronics, has spun off its remaining non-semiconductor operations by setting up companies for its liquid crystal display and telecommunications businesses. See "Hynex Spins Off Non-Chip Groups," Financial Times, July 3, 2001, p. 20.

Turning to financial services, Moore Capital, the so-called macro hedge fund, is in the process of spinning off a new hedge fund group, Agnos Group (no relation to the former Vice President, I hope!). The new group plans to raise a whopping $1 billion. Agnos, incidentally, is Moore's third recent spinoff. For details, see Clow, "Moore Capital Spin-off Looks Close to Reaching $1 bn Target," Financial Times, June 29, 2001, p. 27.

AT&T Flap

On the domestic front (or should I say global?), the Comcast bid — a public bid to buy AT&T's cable assets for a whopping $41.4 billion in stock (plus the assumption of $13.5 billion in debt) has set the world topsy-turvy. See Deogun and Solomon, "Comcast Bid Gives AT&T Breakup Plan an Unexpected Push," Wall Street Journal, July 10, 2001, p. A1. Since AT&T had been trying to do its own thing, this bid has gotten quite a few people more than hot under the collar. Anyway, AT&T certainly used this to spur it on to complete the spinoff of its wireless business, using this occasion to retire a further $1.6 billion of debt. This particular separation marked the first of AT&T's promised radical restructuring, the brainchild announced late in 2000. While it was overshadowed by the Comcast proposal to buy AT&T's cable business, we'll see how all of this will shake out in the end. See Waters, "AT&T Spin-off Cuts Gets By Further $1.6 bn," Financial Times, July 10, 2001, p. 20.

Interestingly, the coverage of the AT&T restructuring has now shifted focus from AT&T's triumph to the Comcast bid. The Wall Street Journal quotes merger experts (although who they are is not clear to me) as well as AT&T shareholders (again, an amorphous group that is not identified) as saying that AT&T may now have no choice but to sell the cable business — if not to Comcast, then to the highest bidder. This is really the wild west! See Deogun and Solomon, "Comcast Bid Gives AT&T Breakup Plan an Unexpected Push," Wall Street Journal, July 10, 2001, p. A8.

Clearly, there are some tax wrinkles involved here, too. AT&T has already been looking for possible buyers of the AT&T business. Few cable companies, it is said, would want to take on AT&T Broadband, because of its substantial debt load. Yet, AT&T Broadband may have value to a number of media companies looking to expand. Let's not forget about tax law, though. For the transaction to be tax-free, AT&T shareholders would need to own a majority of the combined entity. That means that any suitor would need to be smaller than AT&T in order to structure the deal. Comcast, for better or for worse, is the perfect size for such a deal. Other media companies might be too big. Id. at p. A8.

The general press is also watching. So you're likely to get your dose of AT&T spinoff news for a while. See Mehta, "When 2 + 2 = 5: AT&T's Spinoffs Don't Add Up. That Might Not Be So Bad For Shareholders," Fortune, July 9, 2001, p. 160.

Lucent and Others

Before we leave this area, Lucent is worth a note. It's latest revamp to split five businesses into two units is receiving press coverage. Unfortunately, Lucent's earnings plunge has also not been unnoticed. Lucent is seeking to streamline what can only be described as the massive infrastructure it inherited when AT&T spun Lucent off way back in 1996. For details, see Burnham, "Lucent's Latest Revamp to Split Five Businesses Into Two Units," Wall Street Journal, July 11, 2001, p. B7.

Elsewhere, Qualcomm has announced the cancellation of its spinoff of its chip unit. Instead, Qualcomm will reorganize into two business groups. Months of speculation had preceded this announcement as the company scrambles to restructure. See Piu-Wing Tam, "Qualcomm Cancels Spinoff of Chip Unit, Will Reorganize Into 2 Business Groups," Wall Street Journal, July 25, 2001, p. B5. The reaction on the other side of the Atlantic was perhaps more charitable, even though the Financial Times noted that Qualcomm had taken longer than expected to unscramble its mess. See Foremski and Kirschgaessner, "Qualcomm Scraps Chip Spin Off Plans," Financial Times, July 25, 2001, p. 21.

Good Spins

Finally, Rockwell Automation, the engineering company that was recently spun off from Rockwell Collins (the avionics group) has made a big push into Europe. Free of its parent, the Rockwell spin is supposed to be charging away overseas. See Dombey, "Rockwell Spin-Off Sets Aims in Europe," Financial Times, July 9, 2001, p. 23. It is nice to see some good news about spins of late!

Speaking of that, I was particularly happy to see the Business Week article by Robert Barker entitled appropriately "These Spin-Offs Could be Pin-Ups," Business Week, June 25, 2001, p. 118. The author starts with the inimitable phrase (which I find worth quoting) "Spin-offs, carve-outs, bust-ups and all the other corporate weirdness that on Wall Street go by the bland name 'special situations' can be a royal pain to understand." Amen Mr. Barker. "They can also prove uncommonly profitable." See Business Week, July 25, 2001, p. 118.

Barker gives a number of examples of spins that are varied and very interesting. My favorite (besides, I like the picture, reminding me fondly of the days in my youth I once spent there) of the Banff Springs, now a Fairmont Hotel (which came out of Canada's industrial giant, Canadian Pacific). Barker's "pin-up" article is worth a read.

Future of Spins

Indeed, perhaps Barker's nice write-up of good deals in the spin market should give us appropriate closing material for — yes it is back to Lee Shepherd. Shepherd recently wrote about the trend in favor of lessening the requirements for a spin. Her uncharacteristically non-spin (I'm talking political spin here), title was "Will There Be More Loosening of the Spin-off Requirements?" Tax Notes, June 25, 2001, p. 2123. We may come back to this topic in the future, as Shepherd raises a number of interesting points about the history in the making of 355. For those who can't wait, check out the June 25, 2001 issue of Tax Notes and see Lee Shepherd's latest views.

Finally (and I really mean finally this time), a recent piece by Hamilton and Webster, "Actual Knowledge of Shareholders in Tax-Free Spin-offs," Tax Notes, June 25, 2001, p. 2207, is a darned good overview of the rules of Section 355(d) dealing with actual and deemed knowledge of shareholders. On this topic, see also Reg. §1.355-6. Space constraints don't allow us to summarize here all of this, and again we may come back to it in a future issue. For those who can't wait, it is an article worth a read.

Latest Spin News, Vol. 10, No. 2, The M&A Tax Report (September 2001), p. 6.