Congratulations! You own stock in a company that is being bought at a nice premium to where the shares were trading before the takeover announcement. That certainly sounds good — until you see how that could boost your tax bill.
NEW YORK — Congratulations! You own stock in a company that is being bought at a nice premium to where the shares were trading before the takeover announcement. That certainly sounds good — until you see how that could boost your tax bill.
With corporate acquisitions back in vogue, investors in companies being acquired often are quick to note all the benefits that can come from such deals.
But before they uncork the champagne to celebrate, they might want to consider this: Such marriages sometimes will cost them.
Just ask investors in Guidant, the medical-device maker that is being acquired by Johnson & Johnson in a $25 billion deal that was announced in December.
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Sure, this combination has a lot to offer. For one, it would be the biggest acquisition in Johnson & Johnson’s 118-year history. And more importantly, Guidant’s pacemakers and cardiac defibrillators would substantially expand Johnson & Johnson’s line of products and services in cardiology and medical devices.
Even after the run-up in the Guidant share price in the weeks before the merger was officially announced, the $76 a share purchase price is about 2 percent higher than where Guidant’s shares are trading today.
Yet that premium could be offset by what Guidant’s investors get stuck paying in taxes as a result of how the deal was structured.
As explained by Lehman Brothers tax expert Robert Willens, 60(percent of the deal’s $76 a share price tag will be paid in Johnson & Johnson stock and the remaining 40 percent in cash.
While cash is always taxed in an acquisition, in this case the stock will be, too, since the share component isn’t at least 80 percent of the deal.
That means when the merger closes — which is expected later this year — Guidant investors would have to pay capital gains taxes on the difference between the acquisition price and what they paid for the stock.
For investors who have held the stock for at least a year, that would amount to a tax of 15 percent, while those holding the shares for less than a year would have to pay taxes totaling 35 percent.
And while Guidant investors see their taxes rise, Johnson & Johnson would actually gets a tax benefit. That’s right, by making the deal taxable to the target company’s shareholders, Johnson & Johnson then can get a major tax break in the future should it decide to divest the Guidant business.
Who knows why the deal was structured as it was — neither company returned calls for comment. Should Guidant’s investors think that this wasn’t the right way to go, they can vote “no” to this acquisition from going through.
They might bring up the fact that few acquisitions are structured this way. In fact, tax expert Willens can only think of one other time in recent history when the shareholders got stuck with a tax bill like this — Boise Cascade’s $1.3 billion buyout of OfficeMax that closed in December 2003.