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The headline from some financial outlets is that Johnson Controls (NYSE: JCI) is merging with Tyco International (NYSE: TYC) in a “tax avoidance deal.” That’s true, but it omits a lot of important information regarding tax inversions. I actually think that’s the more important aspect of the Johnson-Tyco merger, and I’ll discuss it a moment, but first I want to explore if the merger is a good idea from an operational standpoint.
The businesses are certainly complimentary, as Johnson and Tyco both specialize in home products which are becoming increasingly tied together via technology. Johnson wisely had been divesting itself of non-core businesses like automotive electronics and workforce solutions, while holding on to building products and HVAC technology.
Johnson-Tyco Merger: Good for Shareholders
Each company’s customers are potential customers for the other, so the merger makes sense that way. There’s probably a half billion dollars in savings to be had through cuts. Combined, the companies will sport $4.1 billion in cash and investments and $6.8 billion in low-cost debt. Their net income will be $2.11 billion for the trailing 12 months with $765 million in free cash flow, and about $1 billion in dividends paid to shareholders.
All in all, it’s a good deal for shareholders.
Now, regarding the inversion, this is a function of one simple fact: U.S. corporate taxes are way too high. Were taxes cut so they’d be at least competitive with the rest of the world, then companies wouldn’t have to move overseas to avoid the punitive rates of 395
By comparison, Ireland’s rate is set at a mere 12.5%, the U.K enjoys a 20% rate, while nearby Canada sits at 26.5%. It gets even more ridiculous because if one of our corporations should earn money overseas, it still must pay taxes to that country as well as pay the U.S. rate on net income already taxed overseas!
Implications of Tax Inversions
No wonder Tyco wants to relocate! No wonder companies like Microsoft (NASDAQ: MSFT), Apple (NASDAQ: AAPL), Alphabet (NASDAQ: GOOGL) have billions stashed overseas.
Then think about this: what if that money could be repatriated? Shareholders would get dividends and those companies could use the money to create jobs.
The big secret is out and it can also work in reverse. Foreign companies are buying out U.S. companies so that the latter can be domiciled in the acquirer’s home country, which has a lower tax rate. That means that the U.S. loses jobs when they get moved overseas.
The U.K. is hip to the tax issue. It originally had a 28% tax rate. It dropped it to 20% and saw a 51% increase in corporations moving headquarters to the U.K.
By next year, the U.K. will actually have more companies than the U.S. does.
Congress needs to dump these ridiculous tax rates and get America competitive again. Imagine what would happen if they did that. We’re talking a massive injection of liquidity into our economy, at a time when 94 million people are out of work. We’re talking hundreds of billions of dollars.
In the case of the Johnson-Tyco merger, the result will only be a mere $150 million in annual tax savings. Considering the comparatively small advantage they’ll obtain compared to companies like Apple, but that they did it anyway, demonstrates how much more likely it will be for other companies to follow suit to save even a little money.
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