Giant U.S. drugstore chain Walgreen Co. has become the latest North American corporation to weigh a tax-saving relocation of its headquarters to a friendly European jurisdiction. Even if Walgreen were keen on such a transfer – its top executives have been resisting demands from some key investors – the optics look bad. And the political flak is sure to be heavy.
Most of the pharmaceutical mergers that have tightened office vacancy rates in Dublin recently have been along the lines of the deal announced just last week in which Mallinckrodt Plc, a firm with roots and major operations in the U.S., that relocated to Ireland to save taxes, picked up Questcor Pharmaceuticals Inc. for $6.5-billion (U.S.). In contrast, Walgreen can't claim that it derives large sums from overseas sales, unless you count Puerto Rico and the U.S. Virgin Islands.
That will change when it completes the acquisition of leading European drug retailer and wholesaler Alliance Boots GmbH. The U.S. company purchased 45 per cent of Alliance Boots from its private equity owners in 2012 and is expected to exercise its right to snap up the rest, at a total cost of $16-billion. But Alliance Boots is less than half Walgreen's size.
Still, as in other cases of what the finance experts call corporate inversion, Walgreen would save a considerable amount of money post-merger by re-incorporating in a tax haven. A UBS analysis cited by the Financial Times showed that share profit could rise by 75 per cent.
Yet Walgreen's senior management has put up stiff resistance at a time of growing political and public opposition in their home market. It's bad enough when a tax-avoiding manufacturer or marketer draws the public's ire. But you really don't want customers ticked off at the local pharmacist and going to a competitor to fill their prescription.
U.S. President Barack Obama's latest budget would clamp down on the tax dodge by closing a loophole that allows U.S. companies to move their head offices abroad for tax purposes if an acquisition or merger puts more than 20 per cent of their stock in foreign hands. The budget proposal would set a minimum of more than 50 per cent. That would bar such a move by Walgreen or any other U.S. company still intent on maintaining control of its own destiny.
The budget will remain mired in Washington's political swamp. But there are plenty of Republicans who don't like the perfectly legal tax shifting either. Their main counter is a corporate tax cut to reduce the incentive to move, as well as a territorial tax system that ought to reduce the ability of multinationals to game the system. It's not only the inversions that will be targeted but the vastly larger profits that U.S. companies shield from the taxman by keeping them abroad – almost $2-trillion, by one estimate.
The investors agitating for the Walgreen move – led by Stefano Pessina, the Italian magnate who chairs Alliance Boots, and such opportunistic funds as Goldman Sachs Investment Partners and Jana Partners – are motivated purely by share profit.
Mr. Pessina and his private equity partners ignored public protests when they moved Alliance Boots to the Swiss tax haven of Zug from Nottingham, shortly after taking it private in 2007.
Walgreen's board ought to be thinking about the company's reputation, coming tax code changes and the continuing health of its more than 8,200 U.S. stores operating in a fiercely competitive market and tell the Zug extollers, who control less than 5 per cent of the shares, to keep their tax haven plans to themselves.