In response to recent changes to the U.S. tax code to discourage so-called tax inversion deals, Chicago-based AbbVie recently indicated it was rethinking its $54 billion takeover bid of U.K.-based Shire.
In July 2014, the two companies announced they had agreed to a merger. At least part of the deal was as a tax inversion, in which a larger U.S.-based company acquires a company headquartered in a country with a lower corporate tax rate, then shifts its domicile to that country in order to decrease overall taxes.
However, in September 2014 U.S. Treasury Secretary Jacob Lew laid out new rules to discourage domestic companies from moving their headquarters abroad.
“This action will significantly diminish the ability of inverted companies to escape U.S. taxation,” said Lew in a press conference. “For some companies considering deals, today’s action will mean that inversions no longer make economic sense. It is critical that this unfair loophole be closed.”
With news that the AbbVie-Shire deal was on the rocks, Shire shares dropped by 27 percent.
Analysts indicated that the combined companies’ move to Britain would have reduced AbbVie’s current tax rate of 22 percent to about 13 percent.
It’s not entirely clear whether this is a ploy on the part of AbbVie to pressure Shire into a better deal. In a Reuters article, Cenkos analyst Navid Malik said, “They could have put this out to try and get Shire back to the table to potentially renegotiate but I don’t think that will happen.”
AbbVie is best known for the blockbuster arthritis drug Humira, which will lose U.S. patent protection in 2016.
Shire works in the areas of neuroscience, rare diseases, GI and internal medicine. They are perhaps best known for ADHD medications and therapeutics for ulcerative colitis.
The news, however, surprised many investors.
“Investor reaction is one of confusion and shock and we hope this will be resolved quickly,” wrote Jeffrey Holford in a report today. Holford is an analyst at Jefferies LLC in New York. “The limited communication from AbbVie is exacerbating the level of concern.”
Although the rumors are being tied directly to the Treasury Department’s new regulations, there may be other factors.
“We believe that AbbVie could argue that the rules should not apply to it,” wrote BMO Capital Markets analyst Alex Arfaei in a September report, “because the merger was based on other strategic priorities, such as diversifying the business from Humira or improving its pipeline in attractive specialty markets, and that it is not fair for the Treasury to change the rules after the deal has been announced. Moreover, it is not clear to what extent AbbVie’s expected tax savings after inversion would be impacted by the tactics outlined by the Treasury.
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