New York - AbbVie’s board recommended that shareholders vote against its $51-billion takeover of Shire amid concerns that tax-rule changes would undermine the deal’s rationale.
“Although the strategic rationale of combining our two companies remains strong, the agreed upon valuation is no longer supported as a result of the changes to the tax rules and we did not believe it was in the best interests of our stockholders to proceed,” AbbVie’s chairman and chief executive officer, Richard A. Gonzalez said in a statement.
AbbVie has also been concerned about the potential for more changes to US laws, whether through executive-branch action or legislation in Congress, that will increase future tax bills, people familiar with the matter have said.
The price AbbVie agreed to pay for Shire was the highest that it was able to offer, and the loss of some tax benefits and the related prospect of having to borrow more for the merger have eroded its attractiveness, the people said.
The merger would be the largest casualty yet of rules announced last month by the Treasury Department to make tax inversion deals more difficult. In such transactions, US companies seek to lower their tax bill moving their legal address abroad, often after buying a foreign company. President Barack Obama’s administration has said the rules are necessary to prevent the erosion of the US corporate tax base.
The new rules have had some effect on other deals already. Medtronic said it will borrow $16-billion to finance its purchase of Covidien instead of using cash it keeps overseas, and Salix Pharmaceuticals Ltd and Auxilium Pharmaceuticals cancelled planned inversions.
Treasury is contemplating a second set of rules that would limit companies from engaging in earnings stripping, a practice used by non-US-based companies to load up US operations with debt and effectively shift profits to countries with lower tax rates.
Congress, which could impose even more stringent rules, is deadlocked on the issue and isn’t scheduled to return to Washington until after the November 4 election.
AbbVie began a comprehensive review of the merger after Treasury Secretary Jack Lew announced the measures, people with knowledge of the matter said last month, including the prospect of borrowing as much as $7-billion more than it initially anticipated.
The rules, which apply to deals that close starting September 22, include a prohibition on “hopscotch” loans that let companies access foreign cash without paying US taxes, and impose new curbs on actions that companies can use to make such transactions qualify for favourable tax treatment.
Bloomberg