Tax Inversion Deals Are Back With a Vengeance

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Last September, prodded by President Obama, the Treasury Department established new guidelines to make tax inversion deals less beneficial to companies.tax-inversion-deals
The guidelines made it tougher for U.S. companies to gain access to cash held overseas without having it taxed at U.S. corporate rates.
And the move seemed to succeed. Pfizer (NYSE: PFE) gave up its $120 billion pursuit of AstraZeneca PLC (NYSE: AZN). And the high-profile $54 billion deal between AbbVie (NYSE: ABBV) and Shire PLC (NASDAQ: SHPG) collapsed.
Despite the president labeling such deals as “unpatriotic,” 2014 saw 15 successful tax inversion deals.
Nevertheless, tax inversion deals faded out of the headlines. But no longer. Inversions are back in a big way.

Three Deals in a Week

First, we have the $45 billion attempt by Monsanto (NYSE: MON) to take over Swiss rival Syngenta (NYSE: SYT).
Then in the space of a week, three tax inversion deals were announced by U.S. companies:

  • Three European bottlers of Coca-Cola (NYSE: KO), including Coca-Cola Enterprises (NYSE: CCE), are merging in a $27.5 billion transaction. The new company will be domiciled in the U.K.
  • Fertilizer maker CF Industries (NYSE: CF) is merging with parts of Netherlands-based OCI in a $8 billion deal. The new company will also be based in the U.K.
  • Industrial crane manufacturer Terex (NYSE: TEX) reached an all-stock deal with Finland’s Konecranes (OTC: KNCRF) to form a leader in the industry. It will be domiciled in Finland.

This brings the number of agreed inversion deals so far this year to six. But the pace is picking up.
As Frank Aquila, partner at Sullivan & Cromwell, told the Financial Times, “U.S. companies will continue to seek opportunities to level the playing field until congress and the president recognize that the U.S. tax code disadvantages U.S. businesses.”

Irresistible Attraction

So what makes these tax inversions so attractive to U.S. companies?
There are a number of positives. Right off the top is the lower corporate tax rate. Then there is the fact that companies can access future non-U.S. earnings free of U.S. tax. Companies can also take tax deductions on loans between different parts of their businesses.
But to me, the real attraction is the advantages a lower tax rate gives in deal making. Part of the recent M&A binge is due to this fact.
S&P Capital IQ reports that since January, foreign-domiciled companies have spent over $315 billion in acquiring U.S.-domiciled firms. That is very close to the record set in 2007 for such transactions. A record sure to be broken, probably within weeks.
This trend is confirmed by FactSet. It said that, since the Treasury clampdown in September, 55 U.S. firms have been sold to or targeted by overseas buyers. Many of these acquirers were formed by inversions.
The best known of these type of acquirers may be the Ireland-domiciled Allergan PLC (NYSE: AGN), formerly known as Actavis PLC. It has grown, largely through acquisitions, into a $125 billion pharma powerhouse with revenues over $23 billion. Quite a change from a few years ago when it was a small New Jersey-based generic drug maker!

The Bottom Line

Allergan is just the headliner for these companies created in tax inversions.
But the takeaway for me from an investment standpoint is clear. The advantages are so obvious that I keep track of all the companies that “invert” and become domiciled overseas.
These firms will continue to grow through very advantageous deals here in the U.S. – to the benefit of their shareholders. Their stocks may not all perform like Allergan, which is up 133% in two years. But they will likely outperform their purely U.S.-based peers.

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