Playing tax arbitrage

Cephalon Inc. rejected Valeant Pharmaceuticals International Inc.'s hostile bid last week as too low, but the advantages Valeant's tax structure provides make it hard to see how Cephalon can compete for the affections of shareholders. Thus the response may just be a tactical move to nudge up the offer of $5.7 billion, or $73 per share in cash.

Valeant anticipates a tax rate of about 8% in 4Q10 and has estimated a tax rate of around 10% for 2011. In contrast, Cephalon expects its 2010 tax rate will be about 33%...