Tax inversion clampdown leaves M&A engineers seeking new oil for the deal machine
The collapse of AbbVie’s takeover of Shire shows President Obama has put an end to the tax inversion bonanza for bankers and lawyers but they will find new ways to keep the deal wheels turning
In 2010, a group of corporate lawyers went cycling in the French countryside. They whizzed through the fields, mulling over ways to boost their flagging businesses, on what was part-holiday, part-business trip. The financial crisis was taking its toll. Risk-averse chief executives were worried about mergers and acquisitions. These Lycra-clad legal eagles needed to come up with something to calm their nerves and help restore the ailing deal pipeline.
Eventually, the peloton alighted upon tax inversions – the notion that one company would buy another in a more favourable tax regime, and shift its headquarters to that place in order to cut its existing tax bill. The idea had been in existence for years, but it was rarely used and largely forgotten.
Not so by these cycling solicitors. The lawyers, who worked for an array of different firms in New York and London, decided to blow the dust off this academic trick and try to establish it as something mainstream. New York-based legal firm Skadden led the charge, urging bankers at JP Morgan and Deutsche Bank to pitch tax inversion deals to their clients as a sure-fire way to please shareholders.
The plan worked. Tax inversions gradually gained traction, and fell into common parlance this year, when Pfizer’s bid for AstraZeneca thrust that dry little phrase into the spotlight. The US pharmaceutical giant may have failed to take control of Astra, but it started a trend. Burger King, AbbVie, and Stryker jumped on the tax inversion bandwagon, attempting hundreds of billions of dollars-worth of deals with foreign firms, designed to help them avoid paying billions of dollars of tax in America. The lawyers-on-wheels raked in huge fees, Skadden especially, elbowing its way on to nearly four fifths of all deals done since 2011, according to the Wall Street Journal.
The White House was not a fan of this new vogue. It played the patriotism card for a while, urging companies not to become “corporate deserters”. Last month, it decided enough was enough. It tightened the rules so tax inversions immediately became less financially appealing. Lawyers and bankers blanched at the prospect that this rich seam of M&A activity was about to dry up, whilst analysts questioned whether the new rules would be enough to deter tax inversion deals altogether.
It seems they are. This week, the tax inversion hoopla started to unravel. AbbVie, whose board had spent months persuading the London-listed Shire to agree to a $55bn (£34bn) deal said on Wednesday morning that it was cooling on the partnership. That evening, it backed out of the deal, recommending that its shareholders vote against the proposed acquisition. It was an expensive move. Shire stands to pick up a $1.64bn break fee. But it is far less expensive than the alternative: a deal whose logic has been dismantled.
President Barack Obama might be tempted to claim a victory. In the words of Jack Lew, the US treasury secretary, the government sought to “constrain the creative techniques” and “close the loopholes” some taxpayers were using to avoid paying “their fair share”. The White House should not start crowing too soon. As soon as one loophole closes, another will be quick to open.
Washington lobbyists have already raised fears that activist investors will orchestrate deals between foreign buyers and US firms, turning the latter into “hunted prey”. AbbVie has made a compelling case for the savings it could make by being headquartered outside America. Now the Shire deal has fallen apart, their courtship has only served to make AbbVie a target. If a European or Asian company swoops on the US business, America will still lose out on tax receipts. Only this way, it will also lose the company that paid them.
This is just one of the ways that bankers are working on to keep the M&A pipeline flowing. There are billions of dollars at stake and legal and banking industries whose wheels need regular oiling. The wheels may have fallen off tax inversion schemes, but those lawyers will be back on their bikes working out how to orchestrate another.
It is a rare occasion when the UK’s conservatives, liberals and feminists unite on an issue, but this week, they found themselves agreeing with each other on the subject of egg freezing. The news that Facebook and Apple are offering to pay for the procedure for staff was met with widespread horror in Britain, amid concerns it would place subtle pressure on women to delay motherhood longer than they wanted to.
How differently the news was greeted in America. Most women seemed to accept the news as a self-evidently good thing, a bit like a company offering dental insurance or child care on the premises. Some welcomed it enthusiastically, but many more barely batted an eyelid.
This much was made clear by the length of time it took for the news to emerge in the first place. Facebook has had this practice in place since January. The company leaks like a sieve. Egg freezing is so socially acceptable in Silicon Valley, no one had thought to mention it.
When is a meeting not a meeting? When it’s a walk-through, apparently.
These are becoming increasingly prevalent among New York’s power players who are far too busy and important to set aside time for a meeting. Instead of organising a sit-down chat, they arrange to cross paths with visiting officials as if by accident. There is nothing accidental about it. Arrangements go something like this.
Important Person A has one of their minions invite Important Person B for an office tour, with the promise that Important Person A “may be in town” at the time. Then, just as Important Person B is making polite remarks about the décor, Important Person A “chances” upon them.
In my head, I imagine Michael Bloomberg loitering by the water cooler, feigning business until the other person passed, like a love-struck teenager trying to accidentally bump into a girl they have a crush on. I may be stretching things a little far here, but the whole pantomime of “walk-throughs” is so silly it is almost amusing.
Almost. This is not just a power-play, you see. Behind the careful orchestration lurks a much darker intent, designed to draw a veil over transparency. A meeting that is not a meeting is never minuted. In fact, there is no written record that it ever took place. So when the press asks how many times government officials held discussions with such-and-such company … well, it is as if they had never met.