THQ Adopts Measure To Protect $150 Million 'Tax Shield'

This week UFC Undisputed publisher THQ said that its board of directors approved a rights agreement meant to protect millions of dollars of assets accumulated during its previous years of financial losses. THQ investor relations VP Julie MacMedan told Gamasutra that the company is primarily trying to protect $350 million in federal operating loss carryforwards. A carryforward allows a company to apply past losses to future profits that have yet to occur. By doing this, a company can reduce its tax liability down the line. MacMedan said that the publisher is also trying to protect $24 million in R&D tax credit carryforwards. After a 35 percent federal tax is taken out of THQ's $350 million operating loss carryforward, combined with the $24 million tax credit, THQ has almost $150 million that it can use as a "tax shield" that's good for the next 20 years, explained MacMedan. THQ said last week that it accomplished a "successful turnaround," posting an 8 percent revenue rise to $899.1 million, and net loss of $9 million, a notable improvement over the $431.1 million loss a year prior. Now that THQ is beginning to turn its business around and prepares to generate income, it wants to make sure that those millions of dollars in assets are protected. "As we start to generate income, we want to be able to reduce our taxes, which will save the company cash and increase our earnings," MacMedan said. THQ said that those assets could be under threat if the company underwent an "ownership change," which according to Section 382 of IRS tax law is triggered when one or more 5 percent shareholders in the company increase their ownership in a firm by more than 50 percentage points over a rolling three-year period. If a party were to trigger an ownership change as defined by Section 382, THQ's ability to utilize its tax shield to its fullest extent would be "substantially limited," the company said. The adoption of the rights agreement also has the side-effect of acting as a "poison pill," or a measure that would dissuade a takeover bid. Any potential suitor that would want to acquire THQ simply to gain the publisher's massive tax shield would be out of luck, as an ownership change would greatly limit the value of that shield. MacMedan claimed that the new rights agreement is "not about" preventing a takeover. "The bottom line is that it's not to prevent a takeover … it's to prevent an ownership change in the open market from triggering this tax rule 382."