NEW YORK (
' planned acquisition of
( ACF) could generate a $3 to $5 billion tax windfall that would allow the company to pay for the $3.5 billion deal the day it is completed.
GM will use its past losses to shelter earnings from AmeriCredit. That could presage a host of similar deals by companies that are still rebuilding themselves in the wake of the financial crisis, according to Robert Willens, a well-known corporate tax expert and head of Robert Willens LLC.
GM CFO Chris Liddell briefly alluded to the tax benefits on a public conference call following the deal's announcement.
"AmeriCredit is a taxpayer and clearly under our ownership we would seal those--that taxable income with our tax losses," he said. He gave no specifics, and a company spokeswoman declined to elaborate on his comments.
Accounting rules state that when companies have a better than 50% chance of earning enough money to make use of past losses to offset their tax bill they can claim the losses as an asset, often referred to as a "deferred tax asset." When companies have a history of repeated losses they must take a "valuation allowance" which is recorded as a liability.
Following its emergence from bankruptcy protection at the end of 2009 GM reported a valuation allowance -- which is a combination of previous year losses -- of just over $45 billion.
But if GM becomes consistently profitable again it can reduce the valuation allowance, converting the liability to an asset and giving a boost to earnings and book value.
Chris Brendler, analyst with Stifel Nicholaus, believes AmeriCredit can grow earnings by 10-15% annually as part of GM. That adds up to some $8-12 billion through 2025, the year GM's net operating losses (effectively tax credits from past losses) expire.
Assuming the standard corporate tax rate of 40%, those $8-12 billion of earnings would ordinarily result in a tax bill of $3-5 billion for AmeriCredit. As part of GM, though, AmeriCredit likely won't pay any taxes at all.
Willens believes GM will be able to make the case that it has a better than 50% chance of earning at least $8 billion before its tax credits expire. That means it could add $3.2 billion (the tax bill for that expected $8 billion) both to earnings and book value the day the deal closes.
Though $3.2 billion in earnings is nothing to sneeze at, the growth in book value is likely to have a bigger impact on GM's share price once it goes public, which according to
is expected to happen before the U.S. elections in November.
The boost to book value is likely to outweigh the earnings in investors' minds because they will realize the $3.2 billion in earnings did not come from operating earnings, but rather from some complex tax maneuvering. On the other hand, the equivalent growth in book value will be a permanent part of investors' calculations when they are trying to figure out how to value GM's stock.
"Once those earnings flow into book value, the fact that they arose from an unusual tax accounting benefit isn't going to matter," Willens says.
GM has lots of flexibility in terms of when it records the tax benefit from the deal. It could record the entire $3 billion benefit as soon as the deal closes, or it could slowly lower its valuation allowance over several quarters or even years, according to Willens.
Stretching out the tax benefit over an extended period would attract less attention than recording it all at once, and GM may see that as a good thing. The fact that GM, more than 60% of which is owned by the U.S. government, is using cash to make acquisitions has rubbed many people the wrong way. The strategy stands in contrast to that of
, two other big bailout recipients that have been selling assets.
"If GM has $3.5 billion in cash to buy a financial institution, it seems like it should have paid back taxpayers first," stated Sen. Chuck Grassley (R.,Iowa), in a press release last month after GM announced the deal. "After GM's experience with GMAC, which left GM seeking a taxpayer bailout, you have to think the company and, in turn, the taxpayers, would be better off if GM focused on making cars that people want to buy and stayed clear of repeating its effort to make high-risk car loans."
Grassley has asked TARP inspector general Neil Barofsky to investigate the deal. Among the questions he posed in a letter to Barofsky is whether "the acquisition of AmeriCredit at the price paid by GM
will increase the likelihood that the American taxpayer will recover more of its money from GM than currently estimated."
Willens thinks it will. He points out that an additional benefit to GM from the deal is that AmeriCredit will be able to kick the amount it saves on taxes up to GM.
"I think this is a good deal for GM and a good deal for taxpayers, since they after all are GM shareholders," Willens says.
However, he concedes the Treasury will lose tax revenue from AmeriCredit if it weren't able to use GM's losses to shelter its earnings.
"It depends what the goal is; whether to increase overall tax revenues or to get paid back on the GM investment," Willens says.
Also, as Steven Davidoff pointed out in
The New York Times' DealBook
, a GM acquisition of
, the former GMAC, might have given the government a better chance of recouping its $17.6 billion investment in that institution, which Davidoff argues "looks more at risk." In other words, what's good for GM isn't necessarily good for the government--notwithstanding taxpayers' 60% stake in the automaker.
If the AmeriCredit deal gets done over the concerns of Grassley and others, it could open the floodgates for a host of similar acquisitions by companies that took some of the biggest losses during the financial crisis. As
pointed out in June
, many companies, including GM rival
Ford Motor Co.
, are in a situation similar to GM--with big net operating losses but without enough earnings power to make full use of those losses to offset taxes.
Some of those companies, such as Citigroup, AIG and of course
(FNMA.OB) are still largely owned by taxpayers as GM is. If GM can get its deal through, other potential acquisitions that seemed far-fetched may suddenly appear less so.
One factor that may help GM sell its deal to regulators and politicians is that fact that AmeriCredit, which makes car loans, is a business closely related to GM's. It probably wasn't necessary, however, in the view of Willens. Earlier this year, a former software company called
bought a pair of outdoor sporting goods companies
in order to take advantage of its tax credits
from losses accrued several years earlier.
While companies must prove that tax avoidance wasn't the main reason for the acquisition if challenged by the Internal Revenue Service, the hurdle is quite low, Willens says.
Still, what may have been a low hurdle for Clarus, which few people have heard of, may prove to be a different story for GM. If GM gets its deal done, however, don't be surprised to see other big losers from the crisis start bulking up.
Written by Dan Freed in New York
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.