- The Washington Times - Wednesday, August 6, 2014

Pharmacy giant Walgreens did the patriotic thing this week in rejecting a plan to move its tax residency overseas, a move praised by politicians but panned by investors, who promptly dumped the stock Wednesday and shaved billions of dollars off the company’s market capitalization.

When the news broke Tuesday night that the Illinois-based pharmacy chain would not undertake the move, called an “inversion,” the company sidestepped a growing political controversy. However, the decision contributed to the stock’s tailspin after management also pulled back on revenue and performance projections, according to Morningstar analyst Vishnu Lekraj.

As investors realized the nation’s largest retail drugstore chain would not bank the billions of dollars in savings from moving its base to Switzerland, the company’s stock sank $9.91, or 14.34 percent, Wednesday to close at $59.21. The company’s stock was trading as high as $76 in mid-June.

Mr. Lekraj said that an inversion would have helped Walgreens but not completely fixed the stock’s movement over the past trading day.

“An inversion, assuming there isn’t considerable backlash from consumers, assuming a company isn’t revising its performance projections, all else equal, could raise a company’s valuation by 20 percent,” Mr. Lekraj said.

President Obama recently slammed the recent rush of American companies moving their legal tax base overseas, and Walgreens‘ decision was quickly praised by a string of congressional Democrats.

“Illinois has been their home for more than 110 years, and locating their global business here in the U.S. was the right decision for their customers, employees and shareholders,” said Sen. Richard J. Durbin, Illinois Democrat. ” … It’s the right decision for every taxpayer in Illinois and across America.”

An inversion may occur when a U.S. company and a foreign company merge, leaving the new corporation with a decision to make about how its management will be structured. Under U.S. law, if the resulting corporation is more than 20 percent owned by foreign shareholders, it may “invert” — or move — its tax residency and become headquartered in the partner’s country.

Critics note that nominal U.S. corporate tax rates are among the highest in the industrial world, making it tempting for U.S.-based firms to chase lower rates abroad. Inversion does not necessarily mean the company would move plants, jobs or offices to the foreign country. “The tax law makes it more advantageous to be foreign-based than U.S.-based,” said Eric Toder, a tax policy analyst with the Urban Institute. Mr. Toder added that despite some politicians’ claims, an inversion is not a “tax loophole.”

Walgreens completed the deal on Wednesday to buy European pharmacy chain Alliance Boots for over $15 billion, giving it the option of placing the combined corporation under British or Swiss tax oversight. Walgreens CEO Greg Wasson told analysts Wednesday that the decision to stay in the U.S. was based in part of financial concerns and partly on the expected public backlash.

The company “was mindful of the ongoing public reaction to a potential inversion and Walgreens‘ unique role as an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs,” Mr. Wasson said.

Mr. Obama recently called inversions “unpatriotic,” and the move seems to have become the latest focus for populist distaste of huge corporate deals. The president’s proposed budget would increase the required foreign holdings of a merged international corporation to reach 50 percent before a company could claim its new base has moved to a foreign country.

The new, combined Walgreens-Alliance Boots company will be headquartered in the Chicago area. U.S.-based business for the corporation will remain headquartered in Deerfield, Illinois.

While inversions have been happening since the early 1980s, Mr. Toder says they usually stay under the radar for the average consumer. “Most firms that do inversions are pharmaceutical firms or medical supply companies. They’re not selling directly to consumers. They’re selling to hospitals, doctors’ offices and so forth,” he added.

Pharmaceutical research and medical equipment firms like Mylan Laboratories, AbbVie and Actavis are the biggest examples of inversions so far this year. Food producer Chiquita did an inversion deal last year, but the popular brand doesn’t sell directly to consumers either. It sells to grocery stores.

While new federal regulations could reduce the number of inversions overall, Mr. Toder said, the risk is that it will encourage larger mergers that create more drastic changes in the marketplace.

“The government could do less. There would be less real control, more genuine foreign owned-companies,” Mr. Toder added. “That’s a long story we have to look at.”

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