Deal Inversions Driving U.S. M&A Activity

Tempting overseas tax rates are making many U.S. companies to pursue cross-border deals. A number of deal inversions have been explored in the last 2 years.

Deal inversion is the response of corporations to rising corporate tax rates. For background purposes, corporations pay taxes based on where that corporation ‘lives.’ This is also known as a corporation’s domicile and is generally determined by the location of most of their operations, location of corporate headquarters, or where the company does most of their business. Those corporate tax rates are set by the government of the country, and since corporations naturally prefer to pay less taxes, there is some attraction to changing domicile in order to benefit from a lower tax rate.

In order to actually change domiciles there could be a tremendous amount of expense involved, including moving corporate headquarters, moving operations overseas, etc. However, through a loophole in the U.S. tax code there is something called “inversion” that allows corporations to change where they are domiciled without moving any of their operations.

If at least 20% of a corporation is owned by a foreign entity, then that corporation “lives” in the country of that 20%. So as long as at least 20% of any American company is owned by either a foreign company or a holding company located overseas, that American company, with all of its operations in the U.S., would be domiciled in the foreign country for tax purposes. Inversion can be very lucrative and is not that difficult to accomplish.

Deal Inversions on the Rise

With increased uncertainty about the future of U.S. corporate tax rates, there has been an uptick in the amount of inversion deals being considered. In just the last year, a number of such deals have been explored or accomplished:

1. Akorn Inc (USA) is supposedly exploring a bid for Kremer Urban Pharmaceuticals, the U.S. subsidiary of Belgian drugmaker UCB, for $2B (2014)

2. Burger King (USA) acquired Canadian coffee shop chain Tim Hortons for $12.5B (2014)

3. AbbVie’s (USA) is looking to acquire Shire (UK) for around $54B (2014). If completed, the union will create one of the 50th largest companies in the world.

4. Medtronic Inc. (USA) acquisition of Covidien Plc (Ireland) for $42.9B (2014)

5. Pfizer (USA) attempted to acquire AstraZeneca (UK) for $106B (2014). The deal was ultimately abandoned for unrelated reasons.

6. Mylan (USA) attempting to acquire Meda AB (Sweden) (2014)

7. Walgreen (USA) acquisition of Alliance Boots (UK) for $6.7B (2012)

8. Mallinckrodt (USA) acquisition of Questcor (Ireland) for $5.6B (2014)

9. Fyffes (Ireland) acquisition of Chiquita (USA) for $1.07B (2014)

The temptation to take operations towards better tax rates will always be present, but deal inversions are not without risk. The Federal Trade Commission retains the power to review mergers of U.S. companies. In addition, a new bi-partisan bill called the “No Federal Contracts for Corporate Deserters Act,” was proposed in August 2014, seeking to ban companies that take advantage of inversion deals from receiving contracts from the federal government.

It will be interesting to see if the bill goes through, but for some U.S. companies, missing out on future government contracts might just be worth it.

Adam P.