ACM Partnership, Southampton-Hamilton Company, Tax Matters Partner - Page 10

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          2.  Development of Colgate's Liability Management Partnership               
               The notion that Colgate could use a partnership to acquire             
          its own debt was the breakthrough that overcame Colgate's                   
          reservations, for it provided the opportunity to design an                  
          elaborate superstructure of liability management functions around           
          Merrill's original tax shelter transaction.  To understand the              
          extent to which ACM was designed to serve these functions, we               
          first review the concerns of Colgate's treasury department in               
          this period.                                                                
               A number of developments during 1988 and 1989 posed special            
          challenges for the management of Colgate's debt.  In this period,           
          Colgate radically altered the maturity profile of its debt                  
          through two actions.  First, it used the proceeds from the sale             
          of Kendall in October 1988 to retire over half a billion dollars            
          of commercial paper constituting all of its U.S. short-term debt.           
          Second, it established an employee stock ownership plan (ESOP) in           
          June 1989, financed by issuing $410 million in long-term debt.              
               The substitution of long-term debt for short-term debt                 
          caused Colgate's average debt maturity to exceed substantially              
          the norm in its industry and increased its exposure to interest             
          rate risk.3  Colgate's treasury department expected the Federal             


               3 All other things being equal, the longer the maturity of a           
          debt instrument the more sensitive its value will be to                     
          fluctuations in market interest rates.  Hence, long-term debt               
          tends to carry greater risk than short-term debt of the same                
          issuer.                                                                     




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