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At first it was a trickle. A few relatively unknown pharmaceutical companies acquired international competitors, and moved their headquarters abroad.
Then the pace picked up. Bigger health care companies, including Pfizer and Medtronic, also sought to relocate overseas, claiming that doing so would lower their tax rate and allow them to access trapped cash. Competitors felt pressure to match those financial advantages and began looking for deals of their own.
Now it is a flood. On Friday, AbbVie, a huge drug maker from Chicago, became the latest American multinational to attempt a so-called inversion, offering $46 billion for Shire, a drug maker with an Irish headquarters and a British stock listing.
While its initial bid was rejected, people briefed on AbbVie's plans say it is determined to pursue Shire, or find another foreign company to buy.
Adding to the sense of urgency is a fear of being left behind. As more health care companies go through inversions, those that have not done so are wary of remaining stuck with higher tax rates and less financial flexibility than their peers, making their stocks less attractive by comparison.
"There is an element of keeping up with the Joneses," said Timothy R Larson, head of the international tax practice at Marcum, an accounting firm. "It takes one company with enough public recognition to start that domino effect."
In the health care industry, the dominoes are falling. Companies worth more than $400 billion have tried to leave the United States this year alone, potentially depriving the Treasury Department of billions of dollars in tax revenue. This week alone, the medical device maker Medtronic agreed to buy Covidien in an inversion worth $43 billion, and AbbVie made public its initial offer for Shire.
Other health care companies are considering buying overseas competitors that would allow them to invert. Allergan, currently the target of a hostile takeover attempt by Valeant Pharmaceuticals, was rumoured to be considering a bid for Shire. And investment bankers say dozens more companies are plotting similar moves.
Reducing tax bills is rarely the only motivation for such megadeals. Inversions allow companies to access overseas cash more easily and make future acquisitions more attractive by sheltering foreign earnings overseas.
Furthermore, few companies are willing to buy a company that has no strategic fit.
"The deals have to make sense from a business perspective," said David Toung, an analyst with Argus Research.
Toung said that Shire fit the bill for AbbVie, with a complementary portfolio of drugs. But he acknowledged that like many other big health care companies, AbbVie was looking for overseas targets that would allow it to invert.
"Is it that there are some attractive assets that happen to be in England and Ireland?" he said. "Or is the tax inversion the primary driving factor?"
Other analysts, however, said that the benefits of an inversion would outweigh any traditional advantages from a deal between AbbVie and Shire.
Health care companies are not alone in pursuing inversions. The banana producer Chiquita and the microchip equipment maker Applied Materials are among the other companies effectively renouncing their American citizenship in favour of foreign tax regimes.
More deals are on the horizon. Walgreens, the big pharmacy chain, is considering an inversion, according to people briefed on the matter. And Marcato Capital Management, a hedge fund, is pushing the London-based Intercontinental Hotels Group to sell itself after reports that it turned down a $10 billion offer from an unnamed American company looking to invert.
Lawmakers in Washington have taken note. Various proposals from the House, the Senate and the White House would curtail inversions, or eliminate them. So far, however, none of the proposed laws have gained traction.
Despite the lack of legislative progress, politicians have zeroed in on the issue and are using it as a rallying cry as they push for broader tax reform.
"Congress owes it to the American people to inquire seriously into each and every acquisition, given the dramatic increase in the number of corporate inversions in recent years, while Congress undertakes the necessary and serious effort of tax reform on a truly bipartisan basis," Senator Carl Levin, Democrat of Michigan, said this week, after Medtronic announced its deal.
For pro-business groups, the flurry of inversions is only reinforcing their claims that the American tax code is outdated and uncompetitive.
"The frequent choice of a foreign tax home in cross-border mergers is a clear indication that the US corporate income tax system is no longer competitive," said the Alliance for Competitive Taxation, a lobbying group backed by big American corporations.
AbbVie said on Friday that it had approached Shire in early May about a possible tie-up, but was rejected three times by Shire's board - the latest at the end of May. AbbVie was spun off from Abbott Laboratories last year.
"There can be no certainty that any firm offer will be made," AbbVie said in a statement. "Discussions are no longer ongoing." Nonetheless, people briefed on AbbVie's plans say it has not abandoned them.
Shire called AbbVie's proposal "unsolicited and highly conditional" and said that it "fundamentally undervalued the company and its prospects."
"We believe that Shire has a strong independent future," Susan Kilsby, the Shire chairwoman, said in a statement.
And while Shire shares were up on Friday, the company's resistance suggested that it might follow AstraZeneca, which steadfastly refused to entertain a $119 billion offer from Pfizer.
Echoing concerns expressed by AstraZeneca, those briefed on Shire's thinking say it is wary of accepting AbbVie stock when AbbVie's biggest drug, Humira, a treatment for immune disorders including rheumatoid arthritis, is two years away from losing patent protection. Both Shire and AstraZeneca also argued that the approaches failed to fully recognize their future potential as independent companies.
Nonetheless, as more big American drug makers look for acquisitions that will allow them to invert, Shire is likely to remain a target.
"We believe the race for doing tax inversions will only accelerate, which works" in Shire's favour, Jason Gerberry, an analyst at Leerink, said in a note.
©2014 The New York Times News Service
DEAL DOSE
- On Friday, AbbVie, a huge drug maker from Chicago, became the latest American multinational to attempt a so-called inversion, offering $46 billion for Shire, a drug maker with an Irish headquarters and a British stock listing
- While its initial bid was rejected, people briefed on AbbVie's plans say it is determined to pursue Shire, or find another foreign company to buy
- This week alone, the medical device maker Medtronic agreed to buy Covidien in an inversion worth $43 billion
- Inversions allow companies to access overseas cash more easily and make future acquisitions more attractive by sheltering foreign earnings overseas
- For pro-business groups, the flurry of inversions is only reinforcing their claims that the American tax code is outdated and uncompetitive
