Merger Waves and Corporate Inversions: Causes and Consequences

• Author: Dale R. Martin,Bill Marcum,Deon Strickland
• DOI: http://doi.org/10.1002/jcaf.22068
• Published date: 01 July 2015
• Date: 01 July 2015

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© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22068

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Merger Waves and Corporate

Inversions: Causes and Consequences

Bill Marcum, Dale R. Martin, and Deon Strickland

On July 18,

2014, Abbvie,

the U.S. phar-

maceutical giant,

announced that it was

paying $54 billion

to acquire the U.K.‐

based drug maker

Shire and would be

moving its headquar-

ters to the United

Kingdom. The move

would serve to reduce

Abbvie’s statutory

tax rate from 40%

to 21%. This is the

essence of a corporate

inversion—a merger

between companies

wherein the acquir-

ing firm changes its legal cor-

porate domicile to that of the

foreign firm it acquires, usually

in an attempt to lower its tax

bill. The relatively recent spate

of these transactions has pro-

voked strong commentary from

both the legislative and execu-

tive branches of the federal

government:

The reported deal with

Burger King, an Ameri-

can company, highlights

the need for Congress

to act with urgency to

keep companies in the

U.S. rather than moving

abroad. We need to seri-

ously examine the rea-

sons behind this reported

deal and take steps in the

immediate future to pre-

vent further erosion of

the U.S. tax base.

Sander M. Levin, ranking

member, U.S. House Ways

and Means Committee

Congress should

enact legislation

immediately—

and make it ret-

roactive to May

2014—to shut

down this abuse

of our tax sys-

tem. . . . What we

need as a nation

is a new sense of

economic patrio-

tism, where we

all rise or fall

together.

Secretary of the U.S.

Treasury Jacob J.Lew

The corporate

inversions creat-

ing uproar in the halls of

Congress are instances in

which American‐based firms

purchase foreign firms and

transfer their domicile abroad.

Arguably, the impetus is a

statutory corporate tax rate in

the United States that is the

highest among the 34 members

of the Organization for Eco-

nomic Cooperation and Devel-

opment (OECD) (KPMG,

2015). As the preceding quotes

imply, while these transactions

A number of reports from the business press

have suggested that corporate cash hoarding may

have served as the motivation for the recent rise

in inversions. While access to cash may motivate

some inversions, it is difficult to differentiate the

importance of corporate cash availability from

other influences such as business environment

shocks or relative equity valuations. Regardless

of the specific motivation, inversion transactions

have garnered the attention of the public, the

media and the government. This recent spike in

scrutiny carries with it the possibility that some

action may be taken to at least partially eliminate

any potential tax benefits of an inversion, suggest-

ing that firms considering such a move might be

wise to move quickly. © 2015 Wiley Periodicals, Inc.