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Companies under pressure to consider inverting

The popularity of corporate inversion transactions has grown considerably in the past few years, with notable examples including Medtronic-Covidien, Actavis-Warner Chilcott, Elan-Perrigo and Liberty Global-Virgin Media. Now shareholders in US companies are asking: “If our rivals are doing this, is it something we should be considering?”

The trend is particularly prevalent in the pharmaceuticals/healthcare sector, and while Pfizer’s bid to buy AstraZeneca and establish its headquarters in the UK is an example of an attempted pharma inversion that failed, the corporate appetite for inversions is not dying down.

AbbVie is yet another US pharmaceutical company looking to escape the US tax system by acquiring UK rival Shire. Medtronic spent $43 billion to acquire Covidien and invert into Ireland. Walgreens is still pondering a move to Switzerland that would see it take over Alliance Boots, while Monsanto reportedly held merger talks with Syngenta with an eye on another Swiss inversion. Emerson Electric, too, is thought to be considering an inversion transaction. And Destination Maternity, a US taxpayer, has said it has made two unsuccessful recent approaches to Mothercare, a UK group, about a takeover.

Company shareholders, especially in the US, are now demanding the option be considered.

The lockout effect caused by an outdated US tax code is prompting US multinationals to look at inverting through merger or acquisition as a way of using the cash they have trapped offshore.

The trend is not limited to the pharmaceuticals sector – Liberty Global-Virgin Media, Fyffes-Chiquita and Applied Materials-Tokyo Electron are notable exceptions – but the level of mobility of company supply chains in the pharma sector, and the number of pharma inversions already completed, is prompting shareholders of pharma companies to assess the viability of an inversion.

Bill George, former CEO and chairman of Medtronic, and now a professor at Harvard Business School, sums up the problem for US multinationals.

“To access overseas cash, even for domestic investments, there is a significant incentive for tax headquarters to migrate abroad. The ideal solution is for Congress to rewrite the corporate tax code. But given the stalemate that currently exists in Washington, a tax bill is highly unlikely before 2017,” said George. “In the near term, President Obama should declare a six to 12-month repatriation holiday, enabling companies to bring cash home tax-free provided they present plans to reinvest the funds in capital expenditures, R&D, job creation and new ventures.”

George said he has advocated for this approach since 2010.

“So far, nothing has happened. As a consequence, US companies are finding alternative approaches such as tax inversions,” said George.

Driving forces

Lorcan Tiernan, head of the corporate department at Dillon Eustace in Ireland – a popular destination for the headquarters of the newly-formed company post-inversion – said that, in terms of the crucial factors at play here, it is likely a combination of both the attractiveness of the Irish tax system luring companies in and the lack of attractiveness of the US system driving companies away.

“Although I don’t believe these deals are happening for tax reasons alone,” he said. “While changing a country’s tax policy may be akin to turning an oil tanker, change can happen and few companies will commit money at the scale of these deals based on future tax savings alone. I believe the deals are driven by a more fundamental consolidation drive in the pharma sector. The fact that other sectors haven’t engaged in the inversion trend would seem to support this theory.”

Tiernan agrees that there will be more of these types of inversion transaction in the coming months.

“But it will have a finite life as the US authorities eventually pull together on this,” he said. “Also there is a finite pool of suitable inversion targets.”

Non-tax considerations

Tiernan said there is no reason why inversions would be limited to the pharmaceuticals/healthcare sector, despite the fact the vast majority of inversions have been in this sector.

“A notable exception is the Fyffes/Chiquita merger,” said Tiernan. “As I mentioned, the lack of activity outside this sector would seem to suggest that something other than tax is at play.”

Andrea Bonzano, head of tax at Fiat, said that tax reasons may be behind relocation, but that this needs to be checked on a case-by-case basis.

“Because the world is in a state of globalisation, we need to have an open-minded attitude,” said Bonzano. “Taxpayers need to pay tax correctly and comply with rules but tax authorities also need to be cooperative and understand the difficulties companies face. Some tax regimes are more attractive than others, but a friendly attitude and a low tax rate, driven by the will to attract investments, need not be confused with the availability of tax avoidance schemes.”

“However, it is equally important that countries willing to create a friendly environment for business also provide the maximum level of commitment to collaborate with other tax authorities and monitor investments.”

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