The failed takeover of AstraZeneca by Pfizer might have delivered big benefits to the newly merged business: topping the list was a significantly lower tax rate following an intended move by U.S.-based Pfizer to reincorporate in Britain, home of its target.
Though Pfizer ultimately walked away from the $118 billion deal, U.S. lawmakers, reacting to yet another in a spate of so-called inversions, introduced a bill to counter the trend. The Stop Corporate Inversions Act of 2014 was introduced in both the House and Senate in May to thwart avoidance of U.S. corporate taxation through expansion of non-U.S. business activities by a U.S. company under a foreign parent. Separately, in mid-August Senate Democrats proposed additional restrictions to limit the practice known as earnings stripping, when U.S. companies borrow from their foreign parents and deduct the interest expense on their U.S. taxes.
The SCIA could dampen not just mega-mergers but also cross-border deals by midsized companies, potentially impacting the investments of middle-market private equity firms. To hedge against the harmful implications of the proposed legislation, investors must understand the details of the SCIA in the context of their own deal terms and management control structure.