Inversion express slow to crawl
President Barack Obama’s full- throated denunciation of overseas mergers seems to be slowing down the flow of potential deals
Tim Hortons employees prepare coffee before the company’s annual general meeting in Toronto. Burger King Worldwide is in talks to acquire Tim Hortons. The combined company would be headquartered in Canada, where Tim Hortons is based and taxes are generally lower than in the US. Photograph: Peter Jones/Reuters
President Barack Obama’s full- throated denunciation of overseas mergers that lower US companies’ taxes is throwing cold water on potential deals.
On July 24th Obama referred to companies looking to shift their domicile as “corporate deserters” and aides pledged to curtail the practice with or without Congressional approval. Since then, no companies have announced any of these deals -- known as inversions -- and it’s no coincidence, according to lawyers and investment bankers. The presidential rhetoric has caused several companies exploring inversions to put on the brakes to see what emerges from the political debate, people familiar with the preparations said.
The new caution was seen earlier this month when Walgreen, the largest U.S. drugstore, passed on the opportunity to move its domicile to low-tax Switzerland when it bought Alliance Boots. Pfizer, which is on the hunt for inversion targets in Europe after a failed bid for AstraZeneca, is also treading carefully as its executives try to get a better handle on the political winds before proceeding, two of the people said, asking not to be identified discussing private information.
“Tax-inversion deals is a topic that companies are quite worried about because of the political risk,” said Colin Mayer, a professor of management studies at Said Business School at Oxford. “The issue is now much more politically sensitive, especially after Pfizer’s attempt to buy AstraZeneca.”
Pfizer, one of the the biggest American drugmakers, in April tried to move its domicile to the UK by buying AstraZeneca. It only ended that effort after the London-based company’s board refused to enter talks and the UK government opposed it. The dealmaking hasn’t come to a complete halt.
Burger King Worldwide Inc. is in talks to acquire Tim Hortons, the companies said today. The combined company would be headquartered in Canada, where Tim Hortons is based and taxes are generally lower than in the US.
Between mid-June and late-July, when Obama ramped up his criticism of the deals by calling companies that strike them “corporate deserters,” at least five large American companies announced plans for inversions, including AbbVie and Medtronic.
Since the start of 2012, 21 US companies have announced or completed such deals, or almost half the total of 51 such transactions in the last three decades. After Obama called for “economic patriotism” from business leaders in July, Treasury Secretary Jack Lew said the agency was examining options for new rules that wouldn’t require Congressional sign-off.
Wary of the risks of US action, some companies are leaving an escape hatch open. Medtronic’s agreement to buy Irish-domiciled Covidien for more than $40 billion can be called off if a law is implemented that would mean the new company could “be treated as a United States domestic corporation” for tax purposes.
The increase in criticism from Washington could have an impact on pending deals such as the sale of Nobel Biocare Holding AG. The Swiss maker of dental implants has attracted interest from potential buyers including US-based Danaher Corp. Earlier this year, Monsanto Co., the world’s largest seed company, explored a takeover of rival Syngenta AG that ended without an agreement.
Still, few companies are going to choose acquisition targets based solely on tax advantages. There has to be a strategic logic to a deal too, said Ferdinand Mason, a corporate partner in London at law firm Jones Day. “This type of transaction helps price a deal higher due to tax savings, but that’s not the main reason why you pursue such a deal,” Mason said. “Successful deals will always be driven by strategy and strategy alone.”