The price of Walgreens (WAG) shares plummeted after the company announced that it had no plans to shift its headquarters overseas as part of its acquisition of Allianz Boots and take advantage of the "inversion loophole". The company's management cited reasons like the burden of IRS scrutiny as well as public and media backlash as drivers of the decision. The move may be considered patriotic by some, but did not get the stamp of approval from disappointed shareholders. Wall Street expectation was that Walgreens would follow the footsteps of several other corporations that have acquired companies located in countries with lower corporate tax rates primarily for the benefit of slashing their U.S. tax burden. But Walgreens was not alone in forgoing the overseas tax advantage and retaining its headquarters in the homeland. Agricultural giant Archer Daniels Midland (NYSE:ADM) also decided to move its headquarters to the Chicago area despite rumors of a possible move overseas associated with its recent purchase of Swiss food ingredient producer Wild Flavors.
While these companies refrained from this lucrative but ethically ambiguous option, there are many others who have leveraged it. A recent article in the Wall Street Journal reports that this has been the chief motivation for approximately 66% of international deals announced this year. Corporations such as pharmaceutical company AbbVie have initiated mergers with foreign counterparts in the recent past that could result in large tax dollar savings. So I have been wondering if this was a smart move or a missed opportunity for Walgreens.
Anyone reading the news will see that this topic is heating up in Washington. President Obama has expressed his resolve to tackle this loophole and prevent U.S. companies from "gaming the system". Although any substantial executive action may be easier said than done in the near term, the issue is definitely on the radar. So for a business that is estimated to earn a sizeable chunk of its revenue from Medicare and Medicaid program prescription sales, picking a fight with Washington may not be the greatest idea. Since Walgreens is such a universally recognizable brand, there is greater awareness and somewhat higher exposure to backlash from the government and general public compared to other companies that may not have as much direct consumer recognition. So in the case of a possible inversion investigation, large PR costs would likely be piled on top of legal costs.
Additionally inversion deals could lead to greater burden of corporate gains tax on shareholders even without selling any shares when they receive shares of the new corporation. There are ways to mitigate this impact, but it is another case in point that this route may not be an obvious win for shareholders as it appears to be initially.
The debate over whether it is justified for companies to evaluate the option of inversion deals or not, and what would be the optimal way to dissuade them from it, is not likely to be resolved easily. In the case of Walgreens, while the initial shareholder response to the decision was negative as manifest in its stock price decline, for the long term investor the focus should remain on fundamentals and growth.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am a self-taught individual investor and this article expresses my views based on my own research and is not professional investment advice. I am not being influenced or paid by any organization to write this article.