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MAYTAG SHAREHOLDERS - WHAT WILL YOU PAY IN TAXES?

August 10, 2005

Whirlpool has increased its offer for Maytag to $20 per share - half to be paid in cash, half in Whirlpool stock. (Update - the bid has since been raised to $21, also half in cash and half in stock; the numbers below now reflect the $21 price).

The prospect of payment in stock gets tax people excited because that may make a deal partially tax-free. Alas, not so here:

We are offering to acquire all of Maytag's outstanding shares by means of a merger that would provide Maytag shareholders $20.00 of total consideration per Maytag share in a taxable transaction.

The transaction is a "reverse subsidiary merger." Whirlpool will set up a transitory subsidiary that will merge into Maytag. In the merger, Maytag shares will convert automatically into (roughly) $10 cash and $10 in Whirlpool stock (the exact amount of consideration is subject to adjustment).

The tax law allows mergers to be "tax-free" reorganizations under some circumstances. This isn't one of them.

WHY THIS WOULD BE TAXABLE

While a "reverse subsidiary merger" can qualify as tax-free, that only would work if Whirlpool got "control" (meaning here, 80%) of Maytag for stock. As only 50% of the deal is Whirlpool stock, they fall short.

WHY IT MATTERS LESS THAN YOU MIGHT THINK

In a "tax-free" corporate reorganization, any cash received in the deal is treated as taxable gain starting with the first dollar, until all gain is recognized. If the Whirlpool offer did qualify has a reorganization, it would only benefit Maytag shareholders whose basis is less than $10 (i.e., 50% of the $20 offer price) because all of the cash they would receive would be taxable. Here's how it would work for two hypothetical owners - one who paid $8 for a share of Maytag, and one who paid $13:

					       Owner 1	Owner 2
Purchase price, Maytag share (basis)		 $8.00 	 $13.00 
Offer price			   	         21.00 	 21.00 
Gain 'realized' (cash + stock - basis)	(A)	 13.00 	 8.00 
Cash portion of offer 		        (B)	 10.50 	 10.50 
Taxable gain (lesser of B or A)		        $10.50 	 $8.00 
			
Basis of new Whirlpool stock received		 $8.00 	 $10.50 

WHIRLPOOL DEAL WOULD ALL BE TAXABLE AT ONCE

There is no tax-free feature in the actual Whirlpool offer. Should the Whirlpool proposal be accepted, Maytag shareholders would pay tax as if they had sold their shares for $20 cash. The shares of Whirlpool stock received would be taxed as if they were cash; there is no "like-kind exchange" provision for corporate stock. In real life, the fictional shareholders in the above example would be taxed like this:

				       Owner 1	Owner 2
Purchase price, Maytag share (basis)	 $8.00 	 $13.00 
Offer price		 	         21.00 	 21.00 
Gain 'realized' (cash + stock - basis)	 13.00 	 8.00 
Cash portion of offer 		         10.50 	 10.50 
Taxable gain (same as gain realized)	 $13.00  $8.00 
			
Basis of new Whirlpool stock received	 $10.50  $10.50 

WHAT TAX RATES WOULD APPLY?

If you have held your Maytag shares for over one year, and you have a gain, the gain will be long-term capital gain. The federal tax on this will be no higher than 15%, whether you are in regular tax or AMT. Taxpayers in the 10% or 15% brackets will pay no more than 5% federal tax.

If you have held your shares for less than a year when the deal closes, you will have short-term capital gain taxable at ordinary income rates.

Iowa will tax any gain on the deal at the same rates as ordinary income.

WILL THERE BE ANY AMT EFFECT?

Taxpayers in states with income taxes who also have a big long-term capital gain are likely to face alternative minimum tax. While the capital gain rate is the same for regular tax and AMT, there is no deduction for state taxes for AMT. Taxpayers have to compute both regular tax and AMT and pay the higher tax. When two taxes are computed at the same rate, the one with fewer deductions will probably be higher.

WOULD THE OTHER DEAL BE ANY BETTER, TAX-WISE?

The Ripplewood offer that started the whole Maytag bidding war was a $14 per share cash-merger. This would be treated as a sale of Maytag shares for $14 each. It would be slightly more user-friendly in one sense - all amounts needed to pay taxes on any gain would already be cash. In the Whirlpool deal, Maytag shareholders face the minor inconvenience of selling Whirlpool shares to become fully liquid. The additional $6 for share value of the Whirlpool deal is more than covers this inconvenience.

Strictly from a tax standpoint, there is no advantage to either deal.

CAUTION: THIS ISN'T A DONE DEAL!

This is all based on documents for a transaction that isn't yet settled, and may well settle on different terms. See your own tax advisor for your Maytag deal tax planning.

Links:

Whirlpool Offer for Maytag filed with SEC

Triton (Ripplewood) offer.

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