Consolidation appears to be the new norm. Comcast and Time Warner’s massive merger is under review in Congress, and AT&T/DirecTV had to strike a similar deal just to stay relevant in the telecommunications market.
The latest in acquisition news is Burger King’s purchase of popular Canadian coffee and donuts chain Tim Hortons, a move which will result in the world’s third-largest fast food restaurant. The deal was struck for $11.4 billion, accomplished with an investment from Warren Buffett’s Berkshire Hathaway, which will reportedly buy $3 billion in preferred shares of the company.
The company will also be 51% owned by Brazilian investment company 3G Capital, which has owned Burger King since their $4 billion buyout in 2010.
The acquisition is part of Burger King’s aggressive new strategy for growth, which was outlined in a July Businessweek article about the company’s young CEO Daniel Schwartz. In recent years, the chain has cut its ownership of thousands of stores, instead gaining the majority of its revenue via franchise royalty fees. Burger King has also cut costs across the board, reducing company perks and drastically reducing the size and scope of the corporate structure.
The acquisition of Tim Hortons — albeit a large price to pay upfront — signifies yet another cost-cutting strategy for the company. Following the deal, Burger King will relocate its headquarters to Canada, a move viewed by many as a way to avoid American tax regulations. The tax inversion deal has been a common trend amongst American businesses making foreign acquisitions in recent years, and Burger King will benefit from avoiding the American regulations.
As the New York Times reports, however, Burger King “is expected to save a little bit on taxes,” “rather than a huge reduction.” The relocation is also likely to appeal to Canadian regulators in order to ensure Tim Hortons future in its home country as well as Burger King’s international expansion. Both companies have maintained that their business models and home operations — in Oakville, Ontario and Miami, Florida, respectively — will remain unchanged. Schwartz will also retain his role as chief executive officer of the newly combined company.
Burger King executive chairman Alexandre Behring and 3G Capital co-founder specificially said "[The deal] is not being driven by tax rates."
Although the acquisition threatens to impact the American economy by moving a quintessentially American company to a foreign country, critics should not be so quick to jump on the boycott bandwagon cropping up around Facebook and Twitter. Businesses move where they can make the most money, no different than an athlete choosing to play in income tax-free Texas rather than, say, Illinois.
The corporate tax rate in the U.S. is nearly 40 percent, as compared to roughly 26 percent in Canada. With ownership of Canada’s most iconic chain — which rakes in $8 billion each year — the move is a no-brainer. It’s up to Washington to stop tax inversion deals or reform the way the nation’s corporate tax code is structured, but until then companies cannot be blamed for maximizing profits while operating within the jurisdiction of the law.