Wednesday, August 6, 2014
Walgreens had been working on and considering an inversion for some time, but today it dropped plans to relocate to the UK and announced that it would purchase all of the shares of Alliance Boots (UK) that it did not already own. Does Walgreens' decision to step away from the inversion edge mark the crest of the inversion wave we've been experiencing this summer? Well, yes and no.
Let's start with the no. So long as differential tax rates create opportunities for firms to arbitrage tax rates, there will always be an incentive for firms to pursue inversions. For that reason, any response to the inversion wave that is primarily focused on lowering effective corporate tax rates is a long-term loser. Why? Because until you get to zero, there will always be a jurisdiction with a lower rate. There is will always be an economic incentive to pursue tax arbitrage. My take? Any effort to compete on lower tax rates is a fool's errands. US rates are relatively higher than other jurisdictions, but the effective corporate rate in the US - let's be honest - isn't all that high. So, the incentive to do these deals is likely here to stay.
How about the yes? Well, it's one thing if Mylan does an inversion, most people don't know what that company is. When politicians rail against Mylan for fleeing the US, it doesn't really resonate. But, Walgreens is a different story. There is a Walgreens in almost every town in Massachusetts and they are front and center in many people's lives around the country. My guess is that if Walgreens were to relocate outside the US, the political salience of the inversion question would be sky-high. Perhaps the board saw that coming and decided discretion was the better part of valor.