Shayndi Raice of The Wall Street Journal has a story today on “How Tax Inversions Became the Hottest Trend in M&A.”
Spoiler alert: The short answer is, of course, lawyers.
Raice explains that tax and M&A lawyers from Skadden, Arps, Slate, Meagher & Flom LLP, a giant New York firm, took a bike trip to Southern France in 2010, when merger activity — and hence legal fees — had fallen off. The lawyers were looking for ways to boost business. And they hit upon one.
If you were all ready to lay blame at the feet of Wall Street investment bankers, give yourself partial credit. The Skadden, Arps lawyers came back from their bike tour and started pitching bankers at J.P Morgan Chase & Co, Deutsche Bank and Perella Weinberg Partners, Raice reports. And those banks started pitching the idea to clients in Europe.
Tax inversions, in which U.S. companies merge with foreign ones with the intention of reorganizing abroad to reduce their tax bills, were not new. And companies had long known about the potential tax benefits to be had overseas. But the inversion idea gradually gathered momentum, as The Journal describes, and was made all the more attractive because of the growing billions in foreign cash holdings of U.S. companies. Four years later, inversions have become so common, especially in the pharmaceutical sector, that the president has repeatedly taken aim at the tax law that makes such moves legal, calling the loophole “unpatriotic,” and his Treasury Department is now reportedly looking for ways to limit such relocations, even if it has to bypass Congress again to do it.
“By moving their tax homes overseas, these companies are making the decision to reduce their taxes, forcing a greater share of the responsibility of maintaining core public functions on small businesses and hardworking Americans,” Treasury Secretary Jack Lew wrote in a Washington Post op-ed last week. “While the business-tax-reform process moves steadily forward, the pace of inversions is increasing at breakneck speed. We must confront this problem now, before our tax base is so eroded as to damage the prospects of comprehensive reform.”
While Congress considers legislation and the White House considers steps to close the loophole on its own, Raice cites data from Thomson Reuters showing Skadden has been involved in 78 percent of inversions, by deal value, since 2011. Goldman Sachs has had an even bigger hand in the inversion wave, with an 88 percent share, by deal size, of such transactions. So it isn't just the companies involved in the inversions that are benefitting.
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