US tax fears prompt overseas M&A rush
Tuesday May 17 2011 | 05:50 AM

US multinational companies are stepping up efforts to deploy their overseas earnings in cross-border mergers and acquisitions as they seek to avoid the tax hit from repatriating their so-called “trapped cash”.

The activity has prompted debate among bankers over whether tax issues are distorting business decisions, potentially leading US companies to favour overseas investments over opportunities at home.

“Companies have been asking bankers to find them targets in countries where they can use this cash,” said one adviser. “It is earning them zero and lowers the opportunity cost of an acquisition in an overseas market.”

Other bankers, however, argue that using foreign cash to make acquisitions does not meaningfully contribute to decision-making but is just a bonus.

Use of cash in international deals by US buyers is at record levels, according to Dealogic. Cash-only deals accounted for 90 per cent of international deal activity this year and last, and about 60 per cent of global deals.

Last week, Microsoft said that it would use US$8.5bn in offshore cash to buy Skype, a Luxembourg-based company.

Companies rarely disclose the source of the cash used in deals. But people familiar with the matter said offshore cash was deployed in PepsiCo’s purchase of Russia’s Wimm-Bill-Dann last year and in General Electric’s recent international deals, as well as in a raft of transactions involving healthcare and technology companies with significant foreign earnings.

US technology companies have been particularly vocal in calling for a tax holiday that would enable them to bring funds back to the US. Cisco, which used overseas cash in the $3.3bn purchase of Norway’s Tandberg in 2009, and Microsoft both have more than 80 per cent of their cash and short-term investments offshore.

Senior officials in the Obama administration say they are fiercely opposed to such a move. Critics of a tax holiday worry that repatriated cash will be returned to shareholders rather than invested in job creation.

Companies are also becoming more creative in seeking to use their overseas cash in the US without suffering adverse tax consequences, say experts. Qualcomm in January said it planned to use offshore funds to buy Atheros, the US chipmaker.

Deals of this kind sometimes employ complex structures that can only be used in limited circumstances. Companies must also tread carefully. If the funds are no longer deemed to be “permanently invested” overseas, companies could be forced to provision for their potential tax liability in the US.

Some credit rating agencies only give companies partial credit for cash overseas, assuming that they would lose a chunk to the government were they to bring it onshore.