ARM denies role in Acorn dismemberment
When is a takeover not a takeover? When the tax planners get involved...
Thanks to everyone who referred The Register to ARM’s press release of April 27. "The board of ARM Holdings plc has noted the announcement of the recommended offer made by MSDW Investment Holdings Limited for Acorn Group plc. The board would like to clarify that ARM Holdings plc has no involvement in the transaction." So what’s going on here. Acorn was not taken over by ARM -- as the Financial Times and The Register reported -- but by merchant bank Morgan Stanley Dean Witter (MSDW). This is one of the pitfalls of journalism -- mistakes are made in public. The Acorn dismemberment story is one of our more interesting errors. For the end result is exactly the same as Acorn had been taken over by ARM. Instead of having one very weak shareholder (Acorn) controlling an uncomfortably large stake, now there are many shareholders. This will improve liquidity in ARM shares, already helped by a stock-split last month. And in the long term, should help drive ARM share prices up. Taxman don't cometh So why didn’t ARM buy its own shares back from Acorn. The reason is simple – tax planning. Acorn’s stake in ARM is heavily discounted. And ARM would have to pay somewhere near the market price for its own shares. But then this would leave a hefty capital gains tax liability of £50 million or so. This is where MSDW comes in. Effectively, the investment is buying Acorn with Acorn’s own shares. It is offering two ARM shares for every five Acorn shares. At the same time it will take care of the tax liability. A more precise valuation would see MSDW offering 1 for 2, but then it would make no money. MSDW's reward is a nice chunk of ARM shares -- worth £50 million or so -- more or less the same as the capital tax liability. Now we don’t want you thinking MSDW is a not-for-profit institution. The company will write off the tax liability against tax losses incurred, either here or in the UK. So this £50 million worth of shares represents pure profit. MSDW says it will take a proprietary position in ARM -- in other words it will act on its on account and not as an intermediary for another company. But for how long? Despite this statement, MSDW looks like a parking place for ARM’s shares, until they are off-loaded onto the market for a hefty profit. And where better would those shares end up than ARM? It would get £50 million worth of shares – sans tax liability. Done but not dusted The Acorn dismemberment is not quite a done deal -- another investment bank could always come along and offer the same sort of offer, but making only £25 million profit. However with irrevocable acceptances of more than 50 per cent, it is difficult to see another bank prepared to throw a spanner in the works. Acorn’s institutional shareholders will be happy with the way the company’s ARM shares have been unlocked -- and in such an elegant, tax-efficient way. Acorn’s individual shareholders are entitled to be just a little suspicious -- especially longstanding shareholders who are part of the small army of Acorn platform fans. People who bought into Acorn as a cheap way into ARM will make a handsome profit. And where did the rest of Acorn go? But what about the rest of Acorn -- the two operating businesses are effectively being given away? Yes, we know it is difficult to value loss-making businesses, but using net asset value as the yardstick looks awfully like a device to pay as little as possible. Net asset value is a way of measuring businesses like property companies -- not IP-rich IT design houses. Acorn’s DSP business is being sold for £1.5 million – its net asset value -- to the Acorn management team led by Stan Boland. Presumably Acorn’s cash stays in this business, to meet working capital requirements and fund expansion. The DSP business is the sort of operation that an ST Microelectronics or Phillips Semiconductor will come along one day and buy for several million pounds. Acorn’s set-top operation is to be sold to Pace MicroElectronics for just £200K -- the net asset value of the business. Pace, a mover and shaker in the digital set-top business, also inherits Acorn’s stake in RISC OS. This way, Stan Boland and the Acorn community get to part company. Which is probably for the best, as the two sides have never seemed to get along particularly well. Pace says it remains committed to the RISC OS, which is good news for the Acorn community. But isn’t it really time to make this operating system open source? ®
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