Moving tax base a hit with investors
Published 18/06/2014 | 02:30
THE US government may not be a fan of cross-border takeovers that allow US acquirers to avoid high corporate tax rates. Investors, however, are cheering.
Since 2010, stocks of American companies that announced or completed purchases of an overseas target to shift their incorporation abroad and avoid onerous US levies have outpaced their rivals.
Medical-device maker Medtronic is the latest and largest company to say it will renounce its American address as part of a planned takeover of Dublin-based Covidien Plc.
"They're just doing what profit-seeking people would do – arbitrage the tax differences in these geographies," said Todd Lowenstein, a Los Angeles-based fund manager at HighMark Capital Management.
Inversion deals are on the rise as the largest US companies, facing a corporate tax rate more than double that in Ireland, seek lower tax rates and ways to spend a stockpile of almost $2trn (€1.5trn) in overseas cash.
Of 14 companies that announced or completed deals to shift their domicile since 2010, eight have outperformed the MSCI World Index, according to data compiled by Bloomberg. All but three have gained since announcing their transactions. Incidentally, half of the deals involved a tax shift to Ireland.
Neither Medtronic chief executive officer Omar Ishrak nor the company's executive team have to move to Ireland to consummate the purchase of Covidien.
While the company's tax rate isn't expected to change much, Mr Ishrak said the transaction will let Medtronic better use profit earned overseas.
"That tax matters," said Mr Lowenstein. Redomiciling in a lower rate country means "you have a bigger wallet to do things".
Corporate inversions that occurred between 1993 and 2013 outperformed the market average in the years following the transactions, according to a report by Elizabeth Chorvat at the University of Chicago. Even so, companies' stock prices don't always respond positively, she wrote.
Medtronic can walk away from the deal if US tax law changes, the company said in a regulatory filing. The tax clause would also come into play if both houses of Congress pass legislation that would treat the combined company as an American corporation for federal tax purposes.