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Out the inversion

8 Aug 2014 By Jeffrey Goldfarb

Behold the unversion. U.S.-based data protection firm SafeNet may very well be able to slash its tax rate as part of a cross-border deal. Instead of doing so by acquiring an overseas company – a move known as an inversion – it is selling itself for $890 million to Dutch digital security outfit Gemalto. The deal shows the limitations of a possible U.S. government ban on inversions.

Corporations have been trying to leave U.S. shores apace. Exploiting a portal in the tax code, they are buying smaller rivals in other countries as a way to change domicile and in some cases dramatically reduce their owings to Uncle Sam. The backlash, now joined by President Barack Obama, has become strident. The decision by drugstore chain Walgreen to opt out of a potential inversion this week could be one notable consequence.

Sales of U.S. firms to overseas buyers, though, are not in the crosshairs. Yet SafeNet’s deal could have a similar effect to an inversion. Presumably its tax home can shift from Baltimore to Amsterdam, where its new $8 billion parent company is located. Over half SafeNet’s sales last year were generated outside the United States, Gemalto said on Friday, and would therefore be eligible for a reduced tax rate under a new domicile.

SafeNet was taken private in 2007 by buyout firm Vector Capital so recent financial information is not public. According to a prospectus filed as part of a plan to float again a few years ago, SafeNet indicated it may have some buffers to curb its tax bill temporarily. In its last annual report as a public company, however, the company reported an effective income tax rate of 36 percent in 2003, 42 percent in 2004 and 50 percent in 2005. Last year, Gemalto’s tax rate was 12 percent.

As M&A goes, the SafeNet deal is relatively plain vanilla. The buyer’s shares even went up on the news, as often happens these days. For the anti-inversion crowd, though, it may signify something more important. A Washington crackdown won’t necessarily stop U.S. companies from emigrating. In lieu of seeking a target with a cheaper tax domicile, they may just hang out for-sale signs to attract foreign suitors.


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