FirstWord Lists: US looks to complicate tax-inversion M&A – 4 key questions

What has the US Treasury Department issued?

The department has issued a notice explaining that it and the IRS intend to issue regulations "to combat inversions by reinterpreting its regulatory guidance of a number of Tax Code provisions," noted ISI analyst Terry Haines.

Haines adds that the initial actions (expected to be the first in a series) are "targeted at 'hopscotch' loans; restructuring of a company's foreign subsidiary to gain tax-free treatment; preventing an inverted company from transferring cash or property to avoid US taxation; and strengthening the requirement that the former owners of the US entity own less than 80 per cent of the new combined entity."

Was the notice expected?

Citing a recent conversation with Pfizer CEO Ian Read – who acknowledged that the greatest risk in the near term was "overreach" by the government – Bernstein analyst Tim Anderson suggested it was not that surprising for the Treasury to announce these proposals, particularly as they are "stop-gap measures that undermine the economic merits of inversion, but stop short of blocking it altogether."

Haines added "ever since President Obama stated publicly in early August that he wanted Treasury to do something about inversions as quickly as possible, we have written and said that [Treasury Secretary Jacob J. Lew] and Treasury would act quickly and in meaningful ways."

What has been the immediate impact?

Primarily uncertainty pertaining to a number of agreed but not completed acquisitions. Within the broader healthcare sphere, Medtronic's acquisition of Covidien may undergo review, announced Medtronic on Tuesday with some analysts claiming that Medtronic's aim of using overseas cash now appearing much more difficult.

Within the pharma segment, AbbVie's proposed deal to acquire Shire appears to be relatively 'safe' based on initial analyst assessment. Although a tax-inversion benefit is reflected in the price Abbvie is paying, underlying strategic rationale for the acquisition is perceived to be strong, while AbbVie would also have to pay a sizeable break-up fee if it walked away.

Some doubts have been raised over Mylan's agreed but as-yet uncompleted deal to acquire Abbott's established pharmaceuticals business, partially as securing a competitive tax rate via the acquisition is perceived as being integral to subsequent acquisitions.

The notice would appear to provide additional challenges for Pfizer, if it were to make a second approach to acquire AstraZeneca.

See Spotlight On: US legislation on inversion deals clouds M&A landscape with uncertainty.

What happens next?

Companies considering inversion deals will now have to wait for actual guidance to be issued before they can proceed. By looking to 'catch' a number of announced, but yet completed deals (soon to be issued guidance will be effective from September 22), "aggrieved companies could mount legal challenges on two grounds," notes Haines. "These will focus on whether the Treasury department is exceeding the substantive authority Congress gave it under the tax code, and whether its action is at variance with legal requirements about how regulatory agencies must adopt rules," adds the analyst.

To read more List articles, click here.