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Spin doctors

30 July 2014 By Robert Cyran

Inversions are starting to spin out of control. A quest for tax savings has made digestible overseas targets attractive to U.S. buyers. Hospira’s potential $5 bln deal for a Danone unit highlights a fresh supply, for so-called “spinversions.” The odd combination also reflects the perverse incentives distorting corporate decisions.

Healthcare companies lead the way trying to move domiciles. In just the past six months, there were $319 billion of announced deals in the sector, a figure that already exceeds the record volume in 2007. Irish-headquartered companies such as Covidien, Elan and Warner Chilcott have already been devoured. Pfizer tried unsuccessfully to do the same with AstraZeneca for nearly $120 billion. Certain post codes now carry premium valuations.

There’s a clever new twist on the situation, though. Big companies can spin off a suitably sized division in a favorable jurisdiction, and if an American company acquires it using shares, the acquirer can advantageously change its address. When Pennsylvania-based Mylan acquired a division of Abbott Laboratories, for example, it suddenly became Dutch for tax purposes.

Buying Danone’s medical nutrition business would accomplish something similar for $9 billion Hospira. Other European companies are also getting the idea they might fetch top dollar for unwanted divisions. Consumer goods giant Reckitt Benckiser said this week it plans to separate its pharmaceutical division. GlaxoSmithKline is also studying disposals. Even U.S. conglomerates could do the same by spinning off unwanted divisions to investors and then having them merge with overseas businesses.

The trouble is that tax motives are increasingly trumping strategic logic. Hospira itself was spun off from Abbott a decade ago, leaving Abbott with a sizable and profitable medical nutrition business. While there might be competition concerns, Abbott is nevertheless a far more natural home for Danone’s competing operation than is Hospira, which specializes in drugs that are injected. To justify these otherwise implausible sorts of deals will require a whole different kind of spin.


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