Walgreens feels the heat, reconsiders tax flight
August 12th, 2014
August 12th, 2014
It all started last month when Walgreens, the iconic American pharmacy chain, announced that it would move its headquarters to Switzerland as part of a merger with the European chain Alliance Boots. The move, known as an “inversion”, essentially involves a company merging with another company that is based in a jurisdiction with lower taxes.
Once they merge, the newly formed group will usually move its headquarters to the lower tax jurisdiction to avoid paying taxes in their home country. However, this move is usually a pure technicality, meaning that while the address may change, not much else does. The primary work of the headquarters will usually continue, uninterrupted, at the site of the original headquarters. Inversions have taken Wall Street by storm recently; a proposal from drug giant Pfizer, and another from Medtronic, a Minneapolis-based medical supply company, have come under intense scrutiny. Although some deals have attracted negative media attention, it hasn’t been enough to halt the practice altogether.
This time, something appears to be different. When Walgreens made the announcement last month, everyone from President Obama to investor and owner of the NBA’s Dallas Mavericks, Mark Cuban, criticized the move (you know you’re on shaky ground when you face criticism from other billionaires).
If I own stock in your company and you move offshore for tax reasons I’m selling your stock. There are enough investment choices here
— Mark Cuban (@mcuban) July 25, 2014
President Obama questioned the patriotism of companies pursuing inversion schemes and vowed to move quickly to halt the trend.
Last Wednesday, just one month after details of the planned inversion came to light, Walgreen’s backtracked and said it had reconsidered the inversion element of the merger with Alliance Boots, meaning the combined company would keep its corporate headquarters in Decatur, Illinois. Walgreen’s stock price took a hit, but analysts familiar with the deal noted that it was artificially high following the initial announcement of an inversion in July. And Ajay Jain, an analyst with Cantor Fitzgerald, advised his clients that an inversion would have actually been an investment risk.
It’s unclear whether Walgreen’s about face was actually a response to public pressure or more practical indications that it would not withstand a review from the Internal Revenue Service. While legislation being considered in Congress may or may not address earnings stripping and other inversion-related hijinks, the Walgreen’s story is a cautionary tale for would-be tax avoiders.