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Update: Burger King (NYSE: BKW) stock finished down 4.32% Tuesday after the company's morning announcement that it will merge with Ontario-based coffee-and-donut chain Tim Hortons Inc. (USA) (NYSE: THI). THI stock closed up 8.47%.
In contrast, when news of merger talks originated on Monday, and shares in both BKW and THI enjoyed significant gains and ended that trading session up 19.51% and 18.91% respectively.
There's a reason why BKW stock took a turn and finished in the red Tuesday...
Why BKW Stock Closed Down Tuesday
THI is the largest publicly traded restaurant chain in Canada, while BKW is the second-largest fast food hamburger chain in the world.
Combined, BKW and THI make the third-largest quick service restaurant company in the world, boasting about $23 billion in sales and more than 18,000 restaurants in 100 countries. The new company will be headquartered in Canada, where the largest market exists for it.
The move marks the latest in a series of recent "tax inversion deals" - a merger between a U.S and a foreign company specifically designed to allow the U.S. company to move its headquarters out of the United States to escape America's high corporate tax rate.
You see, the U.S. has the highest corporate tax rate in the industrialized world at 35%. That number has caused about 50 U.S. companies to reincorporate overseas to tax-friendly countries like Ireland over the last 10 years, about half of which are in the Standard & Poor's 500. Recently, even more companies have been making the move. Pfizer Inc. (NYSE: PFE) has been attempting to strike a deal with Britain's AstraZeneca Plc. (NYSE ADR: AZN) all year. On July 18, U.S. drugmaker AbbVie Inc.(NYSE: ABBV) announced plans to merge with Dublin-based pharmaceutical company Shire Plc.(Nasdaq ADR: SHPG) in a $54.7 billion deal. On June 15, Minneapolis-based Medtronic Inc. (NYSE: MDT) bought Ireland-based Covidien Plc. (NYSE: COV).
Comparatively, the Canadian federal corporate tax rate has been cut to 15% under current Prime Minister Stephen Harper. Public companies in the country also must pay provincial corporate taxes that can bring their combined federal and provincial tax rate to approximately 25% - still about 10% lower than the U.S. federal corporate tax rate.
For example, in 2010, formerly California-based Valeant Pharmaceuticals International (NYSE: VRX) merged with Canada's Biovail Corp. and re-domiciled in Canada. The company's tax rate is now less than 5%.
But the deal between BKW and THI will certainly be met with public scrutiny, as the BKW stock drop reflected Tuesday...