Technology companies have not participated much in the recent rush of so-called tax inversion mergers, but the sector includes many good candidates for the controversial tax-reducing deals, several analysts said.
Pharmaceutical, healthcare and retail companies have led the way to use mergers to move their legal residence to foreign countries where tax rates are lower. Drug store chain Walgreen (WAG) could shift its tax basis to Switzerland as part of a merger with European chain Alliance Boots, and medical device maker Medtronic (MDT) could move its headquarters to Ireland as part of a merger with Covidien (COV).
The strategy also allows companies access to cash held overseas without paying the 35% U.S. tax. That’s a big issue for many tech companies.
But not every company can accomplish a tax inversion, even if they plan to acquire a foreign company. Analysts note that the value of the acquired piece must account for 20% of the merged companies after the deal, so some big companies with lots of overseas cash, particularly Apple (AAPL), would have trouble even finding a large enough company to acquire. President Obama and some in Congress are talking about raising the threshold even higher.
Among theoretically possible top tech candidates are printer maker Lexmark International (LXK), data warehouse provider Teradata (TDC) and ATM maker NCR (NCR), according to Morgan Stanley tech analyst Katy Huberty. All three have loads of cash overseas and enough profits to benefit from a tax cut. None of the companies have said they are planning a tax inversion deal.
In the semiconductor niche, there are even more possible deals, according to Christopher Rolland, an analyst at FBR & Co. Offering a dozen possible candidates, he pegs Texas Instruments (TXN), NVDIA (NVDA) and Xilinx (XLNX) as among the most likely. Chip giants Intel (INTC) and Qualcomm (QCOM) could benefit from a tax inversion merger but probably couldn’t complete one, he adds.
The “key benefit” for U.S. tech companies is “the ability to repatriate cash currently trapped overseas without incurring incremental tax expense,” Huberty wrote in a June 28 report. Lexmark, with 98% of its cash holdings overseas, tops the list of tech companies that could benefit, she says. NCR, Apple and NetApp (NTAP) all have at least 80% of their cash outside the United States, she said.
The semiconductor industry has some "extremely interesting potential combinations,” according to Rolland, who has taken his analysis a step further to highlight both possible acquirers and their targets.
Texas Instruments could buy Infineon Technologies, based in Germany, or NXP Semiconductors (NXPI), based in the Netherlands. NVIDIA could seek out a deal with Imagination Technologies of the United Kingdom. And Xilinx could fit with ARM Holdings (ARMH), also based in the UK.
Again, none of the companies has indicated an intent to use the tax inversion strategy, which has multiple requirements to meet even the current tax rules.
“The potential for a change in the tax code could provide a powerful incentive for companies to consummate transactions before the window closes, perhaps at the end of the year,” Rolland said in a recent report. “However, we note inversions are neither simple nor easy to undertake.”
Some of the deals analysts have proposed for tax reasons would be unlikely for other reasons. Intel could in theory buy top competitor ARM Holdings to pull off a tax inversion, but antitrust regulators on both sides of the Atlantic would probably block the deal. Intel’s huge market cap, over $150 billion, also means it would have trouble meeting the 20% rule and ruling out smaller acquisitions.
But with so many deals already announced, there’s no doubt Wall Street bankers will be pitching inversions to all manner of companies, including technology stalwarts.
- Mergers, Acquisitions & Takeovers