Monday, February 21, 2005

Dividend payouts in takeovers

I wrote on closing of a merger deal some months ago.

A new twist now appearing in takeover deals is the inclusion of a one-time payout as part of the merger. The ultra-low tax on dividends makes this very attractive to shareholders. In addition, for deals that likely will take a long time to close, due to regulatory approval procedures, this provides a short-term reward for stockholders while they wait. Both the SBC/AT&T and Verizon/MCI deals have a dividend component - they both are expected to take a year to close.

The dividend tax break wasn't initially meant to be (mis)used in such situations. But then again, may be this is what they had in mind! Just check the millions that got smartly converted from leverage to one-time dividends at companies like Regal Cinemas and MGM! The trickle down economy works - in reverse!


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