Earlier this year, when US pharmaceutical giant Pfizer (PFE) proposed its acquisition of British drug firm AstraZeneca (AZN), it intended to reincorporate in the United Kingdom through a legal maneuver known as inversion. Pfizer’s bid was ultimately rebuffed by AstraZeneca but it did serve to call attention to the accelerating trend of US corporations looking to redomicile in order to lower their tax bill. The rise of inversions may say as much about the lack of opportunities for growth that companies see as it does about the burdensome US tax code or the cleverness of investment bankers and accountants.
The US has the highest corporate tax rate — 35% — in the developed world, and it also stands out because it is one of the few countries in the world that tax overseas profits after they have been repatriated. And while the US tax code has enough loopholes to enable corporate behemoths like General Electric (GE) and Verizon (VZ) to lower their effective tax rates to 0% in recent years, it remains uncompetitive for firms without an army of accountants.
The economy’s anemic recovery has induced US firms to resort to unprecedented acts of financial engineering, including debt-fueled share repurchases, to goose earnings per share. Inversions are another arrow in the financial engineering quiver — a way for management to wring more profits out of a stagnant top line. In a world where capital is cheap and plentiful, it is disheartening to see stock buybacks and inversions become the driving force behind higher corporate profits rather than reinvestment and innovation.
Not unexpectedly, politicians have joined the fray, with some calling inversions “unpatriotic” and promoting legislation to end or discourage the practice through tax reform. Until they do, or until we see a meaningful and sustained economic advance, expect to hear about more inversions.
Below are some other stories that caught my eye in recent weeks.
Strategic Thinking
- Jim Chanos on China, corporate governance, and Bitcoin. (Charlie Rose, video)
- Felix Zulauf expects that we will continue to swim in a sea of liquidity. (Finanz und Wirtschaft)
- Bruce Berkowitz on managing risk and reward. (Institutional Investor, video)
- Charles D. Ellis, CFA on the rise and fall of performance investing. (Financial Analysts Journal)
- From GMO, a farmland investment primer. (GMO, PDF)
- Moneyball, value investing and quality. (Research Affiliates)
Valuation
- Fed Chair Janet Yellen opines on the stock market in the Fed's most recent monetary policy report. (Federal Reserve Board, PDF)
- Aswath Damodaran says investment advice from the Fed is unusual, unwise, and unseemly. (Musings on Markets)
Economics
- "How Money and Banking Work on a Gold Standard" (Philosophical Economics)
- John Authers on the link between wealth and happiness. (Financial Times)
Big Business
- "Coke Confronts Its Big Fat Problem" (Bloomberg Businessweek)
- The New York real estate market has become a stash pad. (New York)
High Profiles
- How Janet Yellen is redefining the Fed. (The New Yorker)
- "The Greatest Deal in Wall St. History" and "How to Blow $9 Billion" (Forbes)
- "Alpha Addict: The Amazing Career of Leon Cooperman" (CNBC)
In Memoriam
- "Wall Street Bids Farewell to Alan Greenberg, Head of Bear Stearns" (The New York Times)
The Lighter Side
- Dilbert on stock splits. (Dilbert)
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
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