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ABSTRACT
In April 1995, Seagram sold 156 million DuPont shares back to DuPont for $8.8 billion to finance its acquisition of MCA. Clever structuring of DuPont's redemption generated tax savings of approximately $1.8 billion for Seagram and DuPont. DuPont captured about $800 million of the total tax benefits in return for facilitating the tax-saving structure. In spite of tax benefits of approximately $1 billion, Seagram's equity value declined by more than $2.5 billion in response to the DuPont redemption/MCA acquisition. Our analyses provide some evidence that a portion of these wealth effects are attributable to the loss of DuPont's earnings, which accounted for approximately 65 percent of Seagram's reported profits. As part of the financial accounting for the DuPont sale, Seagram recorded a $1.5 billion deferred tax liability and this financial accounting liability appears to be significantly overstated in economic terms.
INTRODUCTION
On April 6, 1995 Seagram sold 156 million of its 164.2 million DuPont shares back to DuPont for $8.776 billion to finance its acquisition of MCA. We estimate that the tax savings generated in this transaction were approximately $1.8 billion, which is more than 1 percent of total 1996 U.S. corporate income tax revenues.1 The substantial tax savings were achieved through clever tax planning on the part of both Seagram and DuPont, which resulted in the redemption of over 95 percent of Seagram's DuPont holdings being taxed as a dividend instead of a sale. DuPont's reward for its role in the deal was the acquisition of a large block of its outstanding shares at a discount from market price of about $800 million. Although Seagram realized a sizable share of the total tax benefits (about $1 billion), we estimate that Seagram's market value of equity declined by more than $2.5 billion in response to the sale of its DuPont holdings and subsequent purchase of MCA. The magnitude of tax savings realized in the DuPont redemption resulted in legislative changes that essentially eliminate the tax benefits to similar transactions.
The purposes of this study are: (1) to describe how Seagram and DuPont effectively structured a large stock redemption to increase the after-tax benefits to both contracting parties, (2) to provide a salient example of how contracting parties share tax benefits and to...