TAX LAW EFFECT ON DEALS? YOU BET!

Although it slipped by unnoticed to many during the Christmas/New Year holidays, the announcement that Germany would abolish its tax on disposals of company holdings by other companies (so-called "cross-holdings") is an event of truly monumental proportions. The surprise move is likely to clear the way for many corporate restructurings, and a rage of merger and acquisition activity in Germany. Even though the announcement came right at Christmas eve, these measures were long awaited and are supposed to be included in a draft bill to be submitted shortly. At this writing, despite grumblings from a few sectors, reaction seems uniformly positive. See Simonian, "Germany to Abolish Tax of Disposals of Cross-Holdings," Financial Times, December 24/25, 1999, p. 1.

If one looks at a chart of what London's Financial Times described as the German "web of ownership" as of December 31, 1998, it is truly staggering, with DaimlerChrysler being owned 15.1% by Deutsche Bank. The massive Deutsche Bank also owns 9.3% of Allianz, 9% of Munich Reinsurance, 13% of Metallgesellschaft, and 15% of Philipp Holzmann. The situation with the other big German banks is not all that much better. Dresdner Bank owns 10% of Allianz, 9% of Munich Reinsurance, 12.6% of Metallgesellschaft, 12.1% of Bilfinger & Bergerbau and 15% of Dyckerhoff.

To show the interlocking nature of all of this, note that both Dresdner Bank and Deutsche Bank hold significant chunks of Allianz. Well, Allianz in turn, turns out to hold significant chunks of other entities, including Deutsche Bank (truly interlocking shareholders). Allianz owns 10.4% of BASF, 17.4% of Bayerische Hypo-und Vereinsbank. Allianz owns 5% of Deutsche Bank as noted, 10% of VEBA, and 5.9% of VIAG. (The source for all of these numbers is the Financial Times, Simonian, "Christmas Comes Early for German Boardrooms," Financial Times, December 24/25, 1999, p. 3.

Given the significant value locked up in German companies, a repeal of the onerous German capital gains tax, which under current law can slap a company with a whopping 50% tax on a disposal of shares in another company, would free capital markets enormously. A change in the law would give owners much greater flexibility in dealing with holdings, say virtually all observers. Indeed, investment bankers, lawyers, accountants and investors are all rubbing their hands over the possibility of this unexpected but long hoped for move.

What Goes Up...

The effects were noted even a few days later. The German government's plans to abolish the corporate gains tax on sales of domestic shareholdings presumably spurred Germany's DAX index to its ninth straight record. Of course, German banking and financial sector stocks also soared. However, there are still significant political hurdles that this radical change in the tax law in Germany would need to circumnavigate. See Allund, "German Banking, Finance Stocks Lift DAX Index to Another Record Amid News of Tax Revision," Wall Street Journal, December 28, 1999, p. C14. Of course, euphoria doesn't always last after the champagne. Despite great tax news, the Dax Xetra index closed down 2.9 on January 3. See Stearns, "Germany to Cut Taxes on Gains From Stock Sales," Wall Street Journal, January 4, 2000, p. A19.

Here at The M&A Tax Report, we'll keep watching this important development, as it could make an already frantic European market even more frantic. I spent the week between Christmas and New Years in London, and there was already excitement about the new wave of M&A activity expected to emanate from Germany (even in what is normally a dead time for British business). After all, don't you bet London-based operations are going to be substantially involved?

Tax Law Effect on Deals? You Bet!, Vol. 8, No. 7, M&A Tax Report (February 2000), p. 1.