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Doubts Cast On Tax Inversion Through Acquisition

Doubts Cast On Tax Inversion Through Acquisition

Earlier last week, AbbVie’s management stunned the financial community by announcing that it was reconsidering its £32 billion buyout of Shire Plc. What were the original motivations for this deal? How did we arrive at this situation?

The Players

AbbVie Inc is a Chicago-based pharmaceutical company that began life as an Abbott Laboratories spin-off. It officially listed itself on the New York Stock Exchange (NYSE) in January 2013. Notably, AbbVie owns the patent on Humira – a TNF inhibiting anti-inflammatory drug – which exceeded US$10 billion in global sales. AbbVie has a market capitalisation of circa $97.89 billion (as at 8 November 2014).

Shire Plc is a pharmaceutical company originating from the UK, but is today based in Jersey, Ireland. It first listed on the London Stock Exchange (LSE) in January 1996. Its original product lines include calcium supplements treating and preventing osteoporosis. In July 2014, rights to the investigational Hunter syndrome compound, AGT-182 from ArmaGen were licenced for up to $225 million. Shire has a market capitalisation of circa £24.51 billion (as at 8 November 2014).

Background

This summer has seen a rush of inversion deals, with AbbVie aggressively pursuing Shire, as well as Pfizer’s failed bid for the British drug maker AstraZeneca. This is in response to the US Treasury Department’s announcement that there would be a clampdown on tax inversion transactions to make it more difficult for US companies to relocate their addresses so as to avoid US taxes. Had the deal gone through, AbbVie’s takeover of Shire would have been the largest inversion to date, reducing their tax bills from 22 percent to 13 percent.

Why did the deal collapse?

Negotiations are thought to have been ongoing since 20 June 2014. After repeated rejections, the final offer of £32 billion was settled. As part of the deal, AbbVie would attain a string of rare-disease drugs, including Elaprase and Replagal which respectively treat Hunter syndrome and Fabry disease.

However, on 16 October 2014, AbbVie’s board of directors unexpectedly urged its shareholders to vote against the deal, sending Shire’s stock price plunging by 27 percent. Rumours of the anti-inversion measure by prohibiting hopscotch loans have succeeded in putting a stop to the AbbVie-Shire inversion. This is due to an ‘unacceptable level of uncertainty’ and a senior tax lawyer added that this change in tax rule would cost AbbVie an additional cost of approximately $7 billion, thus eliminating the financial benefits of its original transaction.

US Tax Inversions

AbbVie is not the only company that is seeking a tax inversion. Recently, up to eight companies have sought tax inversions through overseas acquisitions. Each company has reacted differently. The collapse of the AbbVie-Shire deal is but one such reaction. Medtronic reacted differently. Instead of writing off its planned acquisition of Ireland-based Covidien, it has chosen to continue by restructuring its financing.

Still, the collapse of the AbbVie-Shire deal has only reinforced AstraZeneca’s initial doubts about a Pfizer takeover. Such varied responses point to a highly volatile deal-making environment heavily entrenched in politics – something that AstraZeneca’s management was very concerned with. The politically sensitive nature of the proposed deal would have entailed an unnecessary disruption of its vital research and development processes. Under the UK Takeover Panel rules, Pfizer can make a new approach for AstraZeneca after next month when the compulsory cooling-off period expires.

Conclusion

This deal was terminated by agreement between AbbVie and Shire and AbbVie has paid the $1.6 billion break fee in full without waiting for a shareholder vote.

The market will be closely observing these companies’ next moves. Only time will tell if tax inversion via overseas acquisition remains a viable option for US companies.

Law firms such as Slaughter and May led this deal.

 

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