Why Walgreens stepped back from the inversion brink
Pharmacy company Walgreens announced it is not going to invert after all.
Corporate inversion is the practice of one company merging with another that’s based abroad to avoid taxes or gain access to assets held abroad. At least 47 U.S. corporations have reincorporated overseas in the past decade, more than during the past 20 years combined, according to the Congressional Research Service.
Walgreens first began to buy up British firm Alliance Boots two years ago, purchasing a 45 percent stake in the company and laying out plans to purchase the remaining 55 percent in 2015. At some point, Walgreens considered the possibility of converting the deal to buy Alliance Boots into a deal to invert via Alliance Boots.
“We had to look at whether the structure of the deal would allow for an inversion,” says spokesman Michael Polzin, and that structure proved unworkable. “We’d have to rip up that deal and come up with a new deal.”
There’s a special provision in U.S. tax law that says the inversion doesn’t count – that is, the newly formed company won’t be considered a foreign company, and won’t get tax benefits – if the shareholders from the U.S. side of the inversion own 80 percent or more of the newly formed company’s shares going forward.
“Walgreens would’ve had to renegotiate the deal with Boots in order to make sure that Boots’s shareholders ended up with at least 20 percent of the combined merged entity’s stock and that would’ve been difficult to accomplish,” says Dick Harvey, distinguished professor of practice at Villanova School of Law and Graduate Tax Program.
Walgreens is also different from many other companies in that people know it well, and its brand has accumulated significant consumer good will.
“This is a 100-year-old pharmacy in the United States, with a very long and storied legacy and it’s something the consumer is familiar with,” says Ross Muken, senior managing director and partner at ISI Group. “If [pharmaceutical and medical device companies] AbbVie or Covidien leave the United States, no one knows those brands as a consumer. But most people will know Walgreens.”
Consumers could be turned off if the Walgreens they knew skipped town for tax reasons. If consumers didn’t make the connection, an aggressive ad campaign by a competitor could easily help convince them.
There are about eight corporate inversions pending, Harvey says, but he estimates there could be 50 to 100 more in the next year or two. Politicians and government officials are already taking aim at corporate inverters.
“My attitude is, I don’t care if it’s legal, it’s wrong,” President Barack Obama told an audience at Los Angeles Trade-Technical College in a speech July 24. “I propose closing this unpatriotic tax loophole for good.”
Uncle Sam is a customer Walgreens would rather not antagonize — it gets between a quarter and a third of its business from the government through Medicare and Medicaid, says Muken. But most companies considering an inversion don’t have these concerns.
While many businesses wait for comprehensive tax reform, which may or may not materialize, the treasury department announced it would try to close some inversion loop holes on its own. Harvey says this is unlikely to deter many firms.
“There are two or three main benefits from an inversion – and treasury might be able to address one or two of them but there will be other benefits, that could result in businesses inverting even if treasury takes action,” Harvey says.
Those benefits include gaining access to assets held abroad, and stripping out earnings from the United States.
For most firms considering an inversion, he says, those temptations are too good to resist.
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