Inversion perversion

4 August 2014 By Richard Beales

High-flyers at firms like Goldman Sachs sometimes think they can do better if they strike out alone. Many fail, discovering that their employer had more to do with their success than they thought. So it may prove with U.S. companies that merge with foreign counterparts in order to gain domicile overseas and save on taxes.

These so-called inversions are all the rage, exemplified by AbbVie’s $55 billion deal to buy Dublin-based Shire and Pfizer’s nearly $120 billion attempt to buy the UK’s AstraZeneca. President Barack Obama talked recently of a need for “economic patriotism,” and the White House reckons inversions could cost the Internal Revenue Service $17 billion in lost revenue over a decade.

Tax savings are one thing, but big mergers are hard to pull off without destroying value. And just like that Goldman business card, a U.S. domicile has less quantifiable benefits. “The Brothers,” a book by Stephen Kinzer published last year, makes a case that John Foster Dulles and his brother, Allen, respectively secretary of state and head of the CIA in the 1950s, were instrumental in tailoring American foreign policy to the interests of U.S. companies – a tendency that persists today.

Federal rules make it difficult for former U.S. companies that have inverted to get official contracts, which could be costly in itself. But there’s more to government backing than that, as the Dulles brothers showed in supporting the likes of Standard Oil and General Electric in foreign lands, even orchestrating a coup in Guatemala partly under the influence of United Fruit.

Then there’s the legal system. In May, the United States indicted five Chinese military officers for hacking offenses against U.S. companies including Alcoa. The hackers also targeted subsidiaries of foreign firms, but it’s hard to imagine the feds bending over backwards for a recent inverter and, well, Irish enforcers just don’t carry the same weight.

There’s even the Committee on Foreign Investment in the United States, a Treasury-led group that reviews national security issues raised by transactions with foreigners. Though it seems a stretch, CFIUS could someday block an acquisition by a former U.S. company. Uncle Sam’s global economic dominance is slowly waning, but its power still comes with perks that companies might regret giving up.


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