Tax Analysts Blog

Burning the Inversions Fuse at Both Ends

Posted on Sep 12, 2014

It turns out that deal-driven investment bankers have been driving the inversion-ridden agendas of not just tax professionals, but also policymakers these last few months.

It may not exactly be news that the current wave of inversions was unleashed by investment banks looking to jump-start a moribund cross-border mergers and acquisitions market. What is news is that the current wave of anti-inversion hysteria was also instigated by investment bankers looking to forestall a hostile cross-border acquisition of one of their clients.

There has been excellent reporting on how bankers, confronted with shrinking bonuses in the wake of the global financial crisis that began in late 2007, reworked the cross-border M&A play. Starting in 2011, investment banks began touting tax gains from inversions to make foreign targets seem more attractive to potential U.S. acquirers. Those efforts have paid off handsomely.

Outbound U.S. activity has taken off sharply, with almost $350 billion in announced deals so far in 2014, compared with about $150 billion in all of 2013. Inversions have comprised the vast bulk of outbound U.S. activity this year, representing two-thirds of all announced deals, including those later withdrawn. By comparison, inversions were a measly 1 percent of announced outbound U.S. deals in 2011.

Since 2011, about two dozen inversions have been proposed, generating almost $1 billion in advisory fees for investment banks. At the top of the heap is Goldman Sachs, with involvement in 11 transactions. In second place is Morgan Stanley, which had a hand in seven of them. JPMorgan Chase & Co. and Citigroup follow, in that order.

Now we find out that senior investment bankers engaged by U.K. pharmaceutical giant AstraZeneca PLC urged Obama administration officials to clamp down on inversions in early May. At that time, AstraZeneca was fighting to fend off a hostile takeover bid from New York City-based Pfizer Inc., which planned to invert to the United Kingdom.

In a matter of weeks, officialdom in Washington had discovered a new economic evil to combat—corporate desertions. The administration’s position on inversions quickly transformed—from passive objection to demonstrable disgust. As if on cue, Democratic legislators began drafting and circulating new anti-inversion proposals.

Homegrown businesses were denounced for turning their backs on the country that had nourished and supported them with inputs and infrastructure. The spirit behind the earlier much maligned “If You Have a Business, You Didn’t Build That” campaign seemed to have at last found an expression that resonated with both the intelligentsia and the hoi polloi. Newspaper editorials lamented what they characterized as cynical exploitation of a tax loophole, and public opinion polls strongly backed plugging this loophole with changes to the law.

Meanwhile, the prospective hostile deal that had launched this outrage against corporate greed seems to have been successfully halted in its tracks. In late May, after AstraZeneca rejected its last offer, Pfizer decided to walk away. U.K. takeover rules then imposed a cooling-off period; the bankers’ intercession may have been decisive.

Here is the ultimate irony in the story: Investment bankers hired by a foreign multinational confronting acquisition by a U.S. corporation alerted the administration, the politicians, and the country to the imperatives of “economic patriotism.”

And here is the moral: Tax policy, not just tax practice, serves as the handmaiden of investment banking.

A related article will appear in next week’s Tax Notes International.

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