Dow & Dupont Merger is bound to cause a chemical reaction on Capitol Hill

Last week’s announcement by Dow and Dupont that they would merge in a deal that would value the newly combined entity at over USD 120bn is bound to cause yet more consternation on Capitol Hill in Washington as articles begin to emerge about the proposed tax efficiencies this will generate for the new entity.  Tax efficiencies and large US-based multi-national companies are becoming a sore point for policy makers, both in the US, who see their corporate tax dollars being reduced, and for the governments of countries where corporate tax rates are lower and whom are seeing themselves on the wrong end of the deal from the US perspective.

Unlike the Pfizer/Allergan deal, where the new entity will end up with its corporate HQ based in Ireland, the Dow/Dupont deal will see the new entity remaining as a US-based corporate but it will reportedly take advantage of the tax free treatment of the spin-offs that will be carried out after the initial deal. It is believed that ultimately Dow and Dupont will spin off as separate listed companies, the agriculture, materials and speciality products businesses, and whilst no figures are being talked about, you have to assume that the tax savings are sufficient enough over and above any synergistic savings to make such a complex and costly (in terms of advisor fees) process worthwhile for the boards and the shareholders.

Given that 2016 is a US election year and neither the Democrats or Republicans like losing corporate tax dollars, I would not be surprised if US legislators start looking much more closely at the M&A activity of their largest corporates in order to close off some of the rather large tax loopholes!