Avago Technologies Ltd. said the Internal Revenue Service has
declined to assure that its pending $37 billion takeover of
Broadcom Corp. will be tax-free to that company's shareholders,
highlighting an unusual consequence of some cross-border deals.
Singapore-based Avago and California-based Broadcom said in May,
when they announced their tie-up, that they would seek an IRS
ruling that the deal qualified as a tax-free reorganization. They
also included a fallback that would let Broadcom
investors—including its co-founders, who own 8.6% of the
company—defer any tax hit were the deal to end up taxable.
At issue for tax purposes is the two companies' relative size.
If Avago is larger when the deal closes, the transaction will be
tax-free under IRS rules that apply to foreign takeovers of U.S.
companies. If Broadcom is larger, investors will owe taxes on the
newly issued stock they receive. Either way, shareholders will owe
taxes on the cash portion of the deal, which makes up less than
half of the total payment.
Avago had sought the IRS's blessing based on the status quo when
the deal was struck, when Avago was significantly bigger. The gap
has since narrowed: Avago's current market capitalization is $33
billion, versus $31 billion for Broadcom.
Should the deal end up being taxable, Avago has said it is
prepared to offer Broadcom investors tax-deferring partnership
units in lieu of stock, which would let Broadcom shareholders
decide when to make their tax payments. Broadcom negotiated for the
partnership units with the co-founders in mind, a person familiar
with the matter earlier said.
The IRS has historically granted requests for such rulings,
making its decision here unusual, independent tax expert Robert
Willens said. He said Avago's rapid growth through acquisitions
over the past few years could cloud the picture, as the IRS has a
three-year "lookback" window when determining company size in such
situations.
Write to Liz Hoffman at liz.hoffman@wsj.com
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