malenkiyscot (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
malenkiyscot) wrote2006-05-10 04:14 pm
malenkiyscot) wrote2006-05-10 04:14 pm
The Buffett - Werthimer Deal of the Decade
Currently a lively discussion is under way about the Buffett - Werthimer deal on the ration-l mailing list. The main topic is "skill vs luck" in investing. The following post from Yaacov Bergman (professor of Economics at Hebrew U) may be of interest to some.
Colleagues,
TheMarker's front page reports today:
I could have received more money, but I wanted a solution that would be consistent with the essence of Iskar," said Eytan Werthimer, who rejected an offer to sell control of the firm at an $8 Billion valuation. [He actually sold @ $5bn, YB]
http://www.haaretz.co.il/hasite/pages/ShArtPE.jhtml?itemNo=714226
Does this make sense? Would you sell your $300k apartment for only $180, because the deal is "consistent with the essence" of the apartment? (Note that Buffett got a call option on the remaining 20% of Iskar, so, effectively he bought it all.)
But some clever guys write $180k in the apartment sale contract to avoid the appreciation tax on the difference between the declared amount and the true market value which actually changes hands. This leaves a handsome tax savings to be shared between seller and a "consistent with the apartment essence" buyer. The problem is that said transaction is illegal, because it defrauds the tax authority.
But suppose you get the approval of the tax authority for the deal (recall Nehemia Strasler's article yesterday in TheMarker), but you don't want the public to know that this was the case, to avoid protests about the special treatment. Then the deal would seem legal to me -- please correct me if I am wrong, Uriel.* After all, the Werthimers (and others) have received a lavish tax treatment for years, as Strasler noted yesterday; a prolonged, quiet treatment that has not drawn much attention, unlike the Iskar "Deal of the Decade," as it is dubbed by the media here.
This is precisely what I meant in my original speculation about the tax motivation for the Buffett-Werthimer Iskar deal. Indeed, if true, one need not be a financial guru to understand the benefit from such a deal. As Magelan's Peter Lynch has taught us, fifth grade math is sufficient. Whether the market is efficient or otherwise, to beat it with the Deal of the Decade, you do need Buffett's reputation for keeping secrets.
-YB
* My colleague and friend, Prof Uriel Procaccia, who started this interesting discussion, is a renowned expert on corporate law.
--------------
And two quotes from Haaretz:
The head of the Israel Tax Authority (ITA), Jackie Matza, thinks that Buffett's investment will not qualify for the strategic track, and therefore will not receive an exemption from taxes on the profits resulting from Iscar's present operations.
What Iscar will get is a tax exemption for 10 years on all future growth for the company - no small benefit.
...
Because of the investment laws, Iscar pays almost no taxes today. That is how the company has managed to achieve an amazing 30-percent profit margin on sales.
Colleagues,
TheMarker's front page reports today:
I could have received more money, but I wanted a solution that would be consistent with the essence of Iskar," said Eytan Werthimer, who rejected an offer to sell control of the firm at an $8 Billion valuation. [He actually sold @ $5bn, YB]
http://www.haaretz.co.il/hasite/pages/ShArtPE.jhtml?itemNo=714226
Does this make sense? Would you sell your $300k apartment for only $180, because the deal is "consistent with the essence" of the apartment? (Note that Buffett got a call option on the remaining 20% of Iskar, so, effectively he bought it all.)
But some clever guys write $180k in the apartment sale contract to avoid the appreciation tax on the difference between the declared amount and the true market value which actually changes hands. This leaves a handsome tax savings to be shared between seller and a "consistent with the apartment essence" buyer. The problem is that said transaction is illegal, because it defrauds the tax authority.
But suppose you get the approval of the tax authority for the deal (recall Nehemia Strasler's article yesterday in TheMarker), but you don't want the public to know that this was the case, to avoid protests about the special treatment. Then the deal would seem legal to me -- please correct me if I am wrong, Uriel.* After all, the Werthimers (and others) have received a lavish tax treatment for years, as Strasler noted yesterday; a prolonged, quiet treatment that has not drawn much attention, unlike the Iskar "Deal of the Decade," as it is dubbed by the media here.
This is precisely what I meant in my original speculation about the tax motivation for the Buffett-Werthimer Iskar deal. Indeed, if true, one need not be a financial guru to understand the benefit from such a deal. As Magelan's Peter Lynch has taught us, fifth grade math is sufficient. Whether the market is efficient or otherwise, to beat it with the Deal of the Decade, you do need Buffett's reputation for keeping secrets.
-YB
* My colleague and friend, Prof Uriel Procaccia, who started this interesting discussion, is a renowned expert on corporate law.
--------------
And two quotes from Haaretz:
The head of the Israel Tax Authority (ITA), Jackie Matza, thinks that Buffett's investment will not qualify for the strategic track, and therefore will not receive an exemption from taxes on the profits resulting from Iscar's present operations.
What Iscar will get is a tax exemption for 10 years on all future growth for the company - no small benefit.
...
Because of the investment laws, Iscar pays almost no taxes today. That is how the company has managed to achieve an amazing 30-percent profit margin on sales.