INSIGHT-When companies flee US tax system, investors often don't reap big returns

Mon Aug 18, 2014 1:00am EDT
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By Kevin Drawbaugh

WASHINGTON, August 18 (Reuters) - Establishing a tax domicile abroad to avoid U.S. taxes is a hot strategy in corporate America, but many companies that have done such "inversion" deals have failed to produce above-average returns for investors, a Reuters analysis has found.

Looking back three decades at 52 completed transactions, the review showed 19 of the companies have subsequently outperformed the Standard & Poor's 500 index, while 19 have underperformed. Another 10 have been bought by rivals, three have gone out of business and one has reincorporated back in the United States.

Among the poorest performers in the review were oilfield services and engineering firms, all from Texas. Among them was the first of these companies to invert, McDermott International Inc, which moved its tax home-base to Panama in 1983.

Drugmakers are dominating the latest wave of inversions and most of them have outperformed the benchmark index. So far in 2014, five U.S. pharmaceutical firms have agreed to redomicile to Ireland, Canada or the Netherlands. Deals that have not been completed were excluded from the review.

It is impossible to know how the companies might have fared in the market had they not inverted. Innumerable factors other than taxes influence a stock's performance, and no two of these deals are identical, complicating simple comparisons.

But the analysis makes one thing clear: inversions, on their own, despite largely providing the tax savings that companies seek, are no guarantee of superior returns for investors.

The deals basically involve a U.S. company initially forming or buying a foreign company. Then the U.S. company shifts its tax domicile out of the U.S. and into the foreign company's home country. The name "inversion" comes from the idea of turning the company upside down, making a smaller offshore unit the new head and the larger U.S. business the body.

Companies that do these deals typically promise shareholders will benefit. But aside from stock price underperformance by many, inversions can also impose substantial up-front tax costs. When a deal occurs, investors must recognize any taxable capital gains on their stockholdings. These costs are not taken into account in the study as they differ for each shareholder and don't apply in some cases.   Continued...