The board of the North Chicago based biopharmaceutical firm AbbVie (ABBV) has recommended that shareholders shelve their plans to go ahead with a tax inversion strategy. The company has been in the news lately as one among many companies pursuing plans to re-incorporate overseas and reap tax benefits. However, the board has recommended that the company refrain from doing after Washington’s new rules have made such deals less profitable.
American Companies Trying to Survive
According to tax attorneys, the new rules have undoubtedly made re-incorporating overseas less lucrative. On Sept. 22nd, new rules that made it difficult for US companies to pursue inversions and dodge paying high federal taxes on holdings were announced by US Treasury Secretary Jacob Lew. This secretary has done very little to make America a more competitive field to operate in. This is unfortunate.
AbbVie had plans to strike a $55 billion deal to purchase Ireland-based Shire (SHPG) in a bid to cut the combined firms’ future tax bills, save money, create jobs and prosperity, find cures for diseases, and so on. According to the company’s CEO CEO Richard Gonzalez, despite a strong strategic rationale to combine the companies, changes in the tax rules have had the company rethink its strategy and no longer support the overseas move. He said it was not in the best interests of the stockholders.
Pay the Breakup Fee
According to the original terms, AbbVie will now be required to pay over $1.6 billion as a breakup fee to Shire if its shareholders vote against the merger. The funds could be used by Shire to explore new corporate deals and seek other acquisitions in a bid to expand its presence as a global specialty biopharmaceutical company. The Irish headquartered company says it is considering the current situation and is expected to make an announcement in the near future. The new rules and AbbVie’s decision could open up several fresh deal-making permutations since Shire has an impressive track record of acquisitions.
The outcome of AbbVie’s decision may seem like a victory for the Obama administration which is being blasted right now for allowing sick people to fly into America from Ebola infected areas for the sake of politics. Many tax lawyers believe that instead of complaining about the issue, what the Obama administration has to concentrate on is corporate tax reforms. Such as lowering taxes and simplifying the tax code.
So far, corporate America has seriously considered the option to reincorporate overseas to nations with lower taxes while keeping several domestic operations running. This could help them compete with foreign rivals and avoid the high US tax rate of 35% on company earnings. This type of savings could even lead to finding cancer cures and so on because they will have more money on R&D.
Trying to Compete
Over the past decade, as many as 47 US companies have re-incorporated overseas through inversions and there are as many as a dozen deals pending. This includes companies such as Medtronic and Burger King. Chiquita had rejected a buyout offer in favor of tax inversion in August but is reviewing a takeover offer from Brazil based companies prior to deciding whether it would complete its plan to purchase Ireland based Fyffes.
Some tax attorneys are of the opinion that banks could lose as much as $135 million in fees if Abbvie does not go through with the Shire deal. They say the changes to the tax system will curtail the ability of companies to access better cash flows in an efficient manner. For some of the top hedge funds, AbbVie’s decision has hurt their Shire stock. A shareholders meeting has been convened in December to vote on the deal.