The Bottom Line To Investors From Tax Inversions: No Above Average Returns

While it remains to be seen if Obama can put an end to what has been the hottest M&A trend in 2014, namely engaging in tax redomiciling "inversion" deals, it is clear that the C-suite is delighted to continue pursuing deals which minimize the cash outflows to the US Treasury, with some 52 redomiciling deals done since 1983, 22 taking place since 2009 and another 10 being finalized and many more in the works. But what is the track record of tax inversions when it comes to the bottom line, namely investor returns.  According to a Reuters calculation, "companies that have done such "inversion" deals have failed to produce above-average returns for investors."

The details, from looking back three decades at 52 completed transactions, the review showed:

  • 19 of the companies have subsequently outperformed the Standard & Poor's 500 index;
  • 19 have underperformed;
  • 10 have been bought by rivals;
  • 3 have gone out of business;
  • 1 has reincorporated back in the United States.

More from Reuters:

Among the poorest performers in the review were oilfield services and engineering firms, all from Texas. Among them was the first of these companies to invert, McDermott International Inc (MDR.N), which moved its tax home-base to Panama in 1983.


Drugmakers are dominating the latest wave of inversions and most of them have outperformed the benchmark index. So far in 2014, five U.S. pharmaceutical firms have agreed to redomicile to Ireland, Canada or the Netherlands. Deals that have not been completed were excluded from the review.


It is impossible to know how the companies might have fared in the market had they not inverted. Innumerable factors other than taxes influence a stock's performance, and no two of these deals are identical, complicating simple comparisons.


But the analysis makes one thing clear: inversions, on their own, despite largely providing the tax savings that companies seek, are no guarantee of superior returns for investors.


"For some companies, these inversions are really smart business moves. For others, they're less smart ... You don't always know if it's going to work," said James Hines, professor of law and economics at the University of Michigan and one of a handful of academics who have closely studied these deals.

Drilling down on case study #1: Foster Wheeler:

The analysis, using Reuters data and analytics, measured simple share price performance against the S&P 500 index using two benchmarks - the date when each company completed its inversion deal, and the date when each deal was announced. With only four exceptions, the inverted companies that were still in business since doing their deals either uniformly underperformed or outperformed on both benchmarks.


For instance, U.S. engineering and construction group Foster Wheeler AG announced in November 2000 - when its stock was worth about $45 per share - that it was inverting to Bermuda. The deal, a statement said, was "expected to benefit Foster Wheeler and its stockholders for several reasons."


Since the announcement, the company's stock has lagged the S&P 500 by 50 percent; since the deal was concluded in May 2001, it has trailed the index by 83 percent. Foster Wheeler agreed in January 2014 to be acquired by UK rival Amec Plc for about $32.69 per share in Amec stock and cash at the time. The deal is expected to close in the fourth quarter.

Case #2: Eaton:

Ohio's Eaton Corp Plc, a maker of power management products, in 2012 moved its tax domicile to low-tax Ireland by acquiring Cooper Industries, itself an inverted company that reincorporated from the United States to Bermuda in 2002 and then Dublin in 2009. "The acquisition of Cooper was a strategic decision to add scale and breadth to our global electrical business ... The acquisition of Cooper was transformational for our business," said Eaton spokesman Scott Schroeder in emailed comments.


When the deal was announced, Eaton Chief Executive Sandy Cutler said it would shave about $160 million off Eaton's annual tax bill. He said business motivations, not tax reductions, were the key reasons for the transaction. Eaton's effective tax rate in 2013 was only 0.6 percent, down from 2.5 percent in 2012 and from 12.9 percent in 2011, said Eaton's 2013 annual report to federal regulators.


"The lower effective tax rate for 2013, compared to 2012, was primarily attributable to the effects associated with the acquisition of Cooper, along with greater levels of income in lower tax jurisdictions and additional foreign tax credit utilization," Eaton said in the Securities and Exchange Commission filing.


Despite the tax savings, Eaton has underperformed the S&P 500 by 5 percent since completing the Cooper deal in November 2012. But, measuring from the day when the deal was announced in May 2012, Eaton's share price has outperformed the index by 9 percent, Reuters data showed.

Case #3, biotech Xoma, fared so badly it un-inverted 13 years after rushing to expatriate:

The first U.S. drug company in the 52 to complete an inversion was biotechnology group Xoma Corp, which shifted to Bermuda in 1998. Thirteen years later, the company returned its tax domicile to the United States, saying in a statement it wanted to reduce exposure to possibly adverse tax legislation and to come back to a more familiar legal system.


Xoma has posted losses since 2010 and, despite returning to California, has underperformed the S&P500 by 95 percent since it went to Bermuda. A spokeswoman said Xoma had no comment.

So with a spotty track record, what is the impetus behind the M&A surge, aside for eager bankers and lawyers happy to collect this advisory fees? Perhaps for once the president is right and it really is just "herd mentality" and doing what is the faddy corporate transaction du jour:

Concern is growing in Washington about inversions. President Barack Obama has criticized a "herd mentality" by companies seeking deals to escape U.S. corporate taxes.


Of the 52 inversions and similar redomiciling deals done since 1983, 22 have occurred since 2008, with 10 more being finalized and many more said to be in the works.


Following recent deals by major companies such as Medtronic Inc (MDT.N), bankers and analysts have said that another burst of deals is waiting to be unveiled in September.

In any event, if the president has his way, it seems that inversions won't be a hot topic for much longer, and instead yet another government intervention will simply unleash yet another and far more direct way of avoiding paying US corporate taxes: foreign companies buying US-domiciled corporations outright, something which China is surely quite eager to pursue.