Merger Adds To U.S. Tax Exodus
January 26 2016 - 3:02AM
Dow Jones News
(FROM THE WALL STREET JOURNAL 1/26/16)
By Liz Hoffman and Richard Rubin
Johnson Controls Inc. is set to become the latest American
company to move abroad in search of tax savings -- and to do so on
the coattails of the dismantled Tyco empire.
Johnson Controls, an industrial-systems and battery maker whose
Milwaukee roots stretch back to 1885, said Monday it will merge
with Tyco International PLC and take on Tyco's Irish tax address.
The deal, valued at roughly $14.4 billion, is a so-called inversion
that should allow Johnson Controls to lower its tax rate over
time.
The merger -- the first fresh megadeal of 2016 -- highlights the
self-perpetuating nature of inversions, as American companies that
move their legal homes abroad create opportunities for others to
follow. Those deals, in turn, further challenge U.S. regulators
trying to stanch the exodus of tax dollars overseas.
Tyco was an early expat, decamping first to Bermuda in 1997 and
finally settling in Ireland. Over the years, it spawned a crop of
spinoffs and subsidiaries that inherited one of Tyco's most
valuable assets: its foreign tax address. When M&A activity
rebounded after the financial crisis, those new firms became major
players in a wave of cross-border, tax-lowering deals, enabling
American companies with about $70 billion in annual revenue to slip
out of the U.S. tax net.
Tyco paid 12% of its profit in taxes over the past three years,
versus an average 29% by Johnson Controls, according to S&P
Capital IQ. Johnson Controls said its effective tax rate before
certain items was around 19% over the past two years ended Sept.
30.
In some ways, Monday's deal has its roots in the accounting
scandal that rocked Tyco more than a decade ago. After CEO Dennis
Kozlowski's conviction, breakup artist Edward Breen took over with
a mandate to pare Tyco's sprawling empire, which at the time
included everything from pharmaceuticals to burglar alarms. Many of
the resulting offshoots have become targets for U.S. companies
seeking inversion partners, while others have used their lower tax
rates to become consolidators, buying U.S. assets -- which on
average pay higher rates -- and squeezing tax savings that way. In
2012, Tyco sold its pump-and-filter business to Pentair PLC, an
inversion that moved the U.S.-based company abroad. Last summer,
Pentair bought U.S.-based Erico Global for $1.8 billion.
Tyco's health-care business was eventually hived off into two
new companies, both of which have enabled tax-lowering
combinations. A more than $40 billion takeover of Covidien PLC,
which housed Tyco's medical-device business, allowed U.S.-based
Medtronic Inc. to invert last year.
Meanwhile, Mallinckrodt PLC, Tyco's legacy pharmaceuticals arm,
has used its lower tax rate to advantage as an acquirer. In its 2
1/2 years as a stand-alone company, Mallinckrodt has spent nearly
$11 billion on takeovers of higher-taxed U.S. drug assets.
Monday's deal also underscores the snowball effect of
inversions. As such deals pile up in a particular industry, they
enable more -- and -- bigger companies to follow suit. That is
because U.S. rules require foreign targets to be of a certain size
relative to their buyers.
Witness what happened in the pharmaceutical industry. In 2013, a
New-Jersey based drug company called Watson Pharmaceuticals
inverted by buying a small Irish rival. After a series of deals,
the resulting company -- Allergan PLC, with a $117 billion market
value -- is big enough to serve as the inversion partner for Pfizer
Inc., in what would be the largest corporate expatriation ever. The
deal is pending.
And if a combined Pfizer-Allergan spins off its generics
business, as is widely expected, it would create a potential
inversion partner for a host of big U.S. drugmakers.
The Johnson Controls-Tyco deal is at least the 12th inversion
pursued by American companies since the U.S. Department of the
Treasury moved in September 2014 to curb these deals, according to
a Wall Street Journal review. That is roughly the same number in
the 16 months before the move.
"This is yet another example of why we need tax reform to keep
our employers and jobs in America, rather than encouraging them to
move overseas," said House Speaker Paul Ryan (R., Wis.), who has
pushed for a tax overhaul that would, among other changes, lower
the rates U.S. companies pay. Johnson Controls is the largest
public company based in Mr. Ryan's home state of Wisconsin.
---
Dana Mattioli contributed to this article.
(END) Dow Jones Newswires
January 26, 2016 02:47 ET (07:47 GMT)
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