Tags: tax | inversion | corporate mergers | company

Tax-Driven Merger Wave to Drive Markets Higher

By Wednesday, 23 July 2014 07:21 AM Current | Bio | Archive

The current equity bull market is still climbing the veritable “wall of worry.” It is nowhere near the top, but is also high enough that an accidental fall will hurt. A new wave of merger and acquisition activity is about to push it even higher.

Corporate deal making tends to soar near the end of every bull market. Now we have an additional factor: tax inversion. This tax loophole lets American companies escape U.S. corporate taxes on their worldwide income by acquiring a smaller foreign firm.

The loophole isn’t new, but few companies took advantage of it until this year. Medical device maker Medtronic (MDT) was one of the first high-profile companies to run for the border. Last month it bought Irish-based Covidien (COV) for $42.9 billion. Headquarters will stay in the U.S., but the corporate domicile will be Ireland. The tax savings are significant.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

Walgreen (WAG) might hit the exit soon, too. The formerly American company can, if it wishes, defect to Switzerland via its takeover of European drug chain Alliance Boots.

Others will follow, not because they want to but because competitive pressure will force them to act. Imagine what CVS Caremark (CVS) will think if Walgreen goes Swiss.

If Walgreen cuts 10 percent of its tax bill and uses those savings to cut retail prices or hire more pharmacists, CVS will start to bleed real money. The best response will be to arrange its own tax inversion and restore competitive balance with Walgreen.

While I have zero inside knowledge of either company’s plans, simple logic tells me that CVS is probably looking for a suitable foreign acquisition. Negotiations could already be under way.

The same will happen in other industries. All it takes is for one major player to conduct a tax inversion, and the others will have to follow. The numbers are inescapable. U.S. businesses, having grown their profit margins with layoffs and other productivity boosters, have few cost-cutting measures left. Tax inversion is a big one.

The other result of tax inversion will be lower tax revenues for the federal government. Congress is talking about ways to close the loophole, and President Barack Obama would certainly sign it, but no such thing will happen in this election year.

As an investment matter, all the pieces are in place for a merger and acquisition wave unlike any we have ever seen. American business is going to vote with its feet and skip the country. I think we’ll see a mad rush to do it this year, too, lest the new Congress change the law in 2015.

Past M&A booms haven’t ended well. Companies make ill-advised transactions that go south quickly. Managers who approve the deals make big bucks for themselves and leave shareholders to clean up the mess — but that part is years away.

The fun part is here now. Don’t get between a company and the border the rest of this year. They’ll run right over you.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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PatrickWatson
The current equity bull market is still climbing the veritable “wall of worry.” It is nowhere near the top, but is also high enough that an accidental fall will hurt. A new wave of merger and acquisition activity is about to push it even higher.
tax, inversion, corporate mergers, company
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2014-21-23
Wednesday, 23 July 2014 07:21 AM
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