US companies regain their appetite for tax inversion deals
US companies have regained their appetite for controversial foreign takeovers that allow them to move overseas and escape US taxes, in spite of a White House crackdown to restrict so-called tax inversions last year, reports the Financial Times.
According to several senior corporate advisers in the US and Europe, demand for such deals has picked up significantly in recent months and set the expectation that more transactions will be announced this year.
The largest attempted tax inversion in more than a year was revealed last week when it emerged that Monsanto, the US agribusiness company, had structured its unsolicited $45bn takeover of Switzerland’s Syngenta as an inversion that would allow it to move its domicile to the UK, where corporate tax rates are lower. Syngenta has refused to engage with Monsanto and rebuffed its takeover approaches so far.
The desire for inversion deals comes amid feverish deal activity led by the US, as companies look to use cheap debt and high share prices to squeeze every possible synergy, including tax benefits, out of potential takeovers.
But the attempted inversions fly in the face of the US government, which moved last year to reduce the attractiveness of these deals after a flurry of transactions in 2014. US President Barack Obama has labelled the practice “unpatriotic”.
The US Treasury took specific actions in September designed to limit the benefits of inversions after at least 15 US companies struck such transactions last year. A number of others, including drugmakers Pfizer and AbbVie, launched ultimately failed bids at tax inversion deals.
“For some companies considering mergers, today’s action will mean that inversions no longer make economic sense,” the Treasury said at the time.
The measures were designed to prevent an inverted US company from using various structures to access its deferred overseas earnings without paying US taxes. The Treasury also homed in on transactions where the target company’s shareholders would only own between 20 and 40 per cent of the newly formed company, by strengthening the requirements on the US company seeking the inversion.
“Initially executives were shocked by the decision taken by the government and decided that they didn’t want to hear about inversions anymore,” said one banker who helps with tax structuring on mergers and acquisitions.
However, he said that corporate boards were looking at tax inversion proposals at a pace that was nearly the same as before the US government clamped down on the move. “They are willing to take more risk and structure deals in a way that goes around the new rules not against them,” the banker said.
In addition to lower future corporate tax rates, other benefits to would-be inverters include their ability to access future non-US earnings — as opposed to their existing cash piles — free of US tax, and their ability to take generous tax deductions on loans between different parts of their business.
At least three tax inversion deals have been reached since the US Treasury action: medical equipment maker Steris said it would buy the UK’s Synergy Healthcare for US$1.9bn, Cyberonics took over Italy’s Sorin for close to US$3bn, and US networking equipment maker Arris agreed to acquire the UK’s Pace for US$2.1bn.
“The simple answer is that transatlantic M&A involving healthcare and pharma companies is coming back. Those kinds of businesses in particular lend themselves to inversion, because they already have tax planning constructs within them,” one international M&A lawyer said.
When asked in April about the possibility of Pfizer seeking another tax inversion deal after its unsuccessful attempts to buy the UK’s AstraZeneca last year, the company said it was focused on reducing its expenses, including tax.
Ian Read, Pfizer’s chief executive, said: “The new rules — or not the new rules, the new proposed rule change — does make it more difficult to immediately realise any benefits from being redomiciled. But it really depends upon the target.”
