A $54 billion pharmaceutical merger is up in the air after the U.S. Treasury Department said it would crack down on so-called corporate inversions — that’s when a U.S. business merges with a foreign company to save money on taxes. Illinois-based AbbVie Inc. is reconsidering an agreement to buy UK rival Shire PLC.
AbbVie hasn’t called off the merger, but the company says its board is rethinking the deal in light of new tax regulations. The Treasury Department announced changes last month that make inversions less attractive.
It’s likely that AbbVie will renegotiate rather than walk away, says tax consultant Robert Willens, and not just because the company risks a $1.6 billion breakup fee.
“They’re going to lose a lot of credibility if they pull out of the deal in response to the Treasury announcement, after telling the market for weeks that the deal was primarily motivated by business reasons,” he says.
To comply with the Treasury rules, AbbVie could restructure the deal so that Shire shareholders had more control.
“But that’s not necessarily a desirable result for the acquirers,” says Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “I’m not sure we’re going to see a lot of those kinds of deals go through.”
Still, several high profile inversions are moving forward, including Burger King’s acquisition of Canadian chain Tim Horton’s. Medical device maker Medtronic said it would refinance its deal to buy Irish company Covidien to comply with the new rules.
Willens says new inversions have slowed down since the regulations changed, but stopping them would require tougher action by Congress. The rules do not address a practice known as “earnings stripping,” for example, which allows a foreign parent company to essentially lend money to its American subsidiary, and then deduct the interest payments from its taxes.
The congressional Joint Committee on Taxation has estimated that a bill to stop corporate inversions would save the U.S. Treasury about $20 billion over ten years.