U.S. Corporate Tax Rate Makes Ireland the M&A Hotspot

No wonder U.S. President Barack Obama addressed the U.S. corporate tax rate in his "grand bargain" proposal Tuesday...

Avoidance or lowering of taxes has become a major consideration of corporate managements around the world. This is a result no doubt of the pursuit globally by governments of more and more money through taxes from both corporations and individuals.

The recent $8.6 billion deal in the pharmaceutical sector between Perrigo Company (NYSE: PRGO) and Ireland-based Elan Corp. PLC (NYSE ADR: ELN) could be the poster child for the effect of this trend - it drives corporate revenue out of the United States.

Now the president has proposed cutting the U.S. corporate tax rate from 35% to 28%, and giving manufacturers a preferred rate of 25%. He also plans on a minimum tax on foreign earnings to target corporate tax evasion.

President Obama wants to use the money generated from overhauling the tax code to fund infrastructure projects and education improvement programs - all of which will generate more U.S. jobs.

But until this deal gets passed - if ever - the high U.S. corporate tax rate will keep sending companies like Perrigo in search of desirable corporate targets overseas.

One of the favored spots: Ireland.

Why Elan is a Good Deal for Perrigo

Perrigo, a maker of over-the-counter drugs for the store brand market, is paying Elan shareholders $6.25 in cash and $10.25 in Perrigo stock. Perrigo also sells generic drugs, nutritional products, infant formulas and animal remedies.

One key asset Perrigo acquires with its purchase of Elan is the royalty stream on the multiple sclerosis drug Tysabri. Elan had sold a 50% interest in Tysabri to Biogen on Feb. 6, 2013 for $3.25 billion. It retained royalties from the drug that had sales of $1.6 billion last year.

But Tysabri and Elan's other products are just bonuses to the real sweet spot of the deal: The corporate tax rate in Ireland is only 12.5%, the lowest rate in the developed world.

Most analysts applauded Perrigo's move. UBS analyst Ami Fadia told Bloomberg, "A lower tax rate could put it in a much stronger position to grow inorganically going forward."

Perrigo also gets access to Elan's more than $2 billion worth in tax deductions (mainly in Ireland).

Additionally, Ireland has a number of double taxation treaties with over 60 countries around the globe. Irish-based companies therefore avoid paying taxes twice, in two countries, on the same income.

These features make Ireland exceptionally popular among American companies that have operations all around the globe.

Not long ago, industrial firm Eaton reincorporated itself in Ireland. Tech giant Apple Inc. (Nasdaq: AAPL) bases most of its international operations in Ireland.

Pharmas on the Move

Ireland is exceptionally popular among U.S. pharmaceutical companies with global operations or aspirations. Perrigo is only the latest U.S. pharmaceutical company making the move to Ireland.

In May, Actavis Inc. (NYSE: ACT), formerly Watson Pharmaceuticals, paid $5 billion to acquire Dublin-based Warner Chilcott.

It acquired some brand-name drugs to balance out its portfolio of generic and specialty drugs.

But again, the real motivating factor for the deal was taxes.

The company's CEO Paul Bisaro told Fortune that his company's effective tax rate would drop from 28% currently to 17%.

Perrigo CEO Joe Papa says that his firm's effective tax rate will drop from 30% now to 17% in the first 12 to 18 months after the Elan deal closes.  

Who Will Flee the U.S. Corporate Tax Rate Next

Actavis and Perrigo will not be the last U.S. pharmaceutical firms to make the move to Ireland. There are still a few targets left.

Other companies with the potential to be acquired, as pointed out by Reuters, include Shire PLC ADR (Nasdaq: SHPG) and Jazz Pharmaceuticals PLC (Nasdaq: JAZZ).

Shire is a specialty pharma company that focuses on certain sectors including attention deficit and hyperactivity disorder (ADHD), gastrointestinal diseases, regenerative medicine and human genetic therapies.  

California-based Jazz Pharmaceuticals was one of the first U.S. pharma companies to move its domicile to Ireland. It did so when it acquired Irish drug company Azur Pharma in 2011. It is also a specialty pharma firm, which has products to treat sleepiness, chronic pain, and psychiatric diseases including schizophrenia and obsessive compulsive disorder.

Two likely U.S. drug firms to make a bid for Irish assets are Forest Laboratories Inc. (NYSE: FRX) and Allergan Inc. (NYSE: AGN). Both companies were rumored to be preparing bids for Elan when Perrigo beat them to the punch.

Forest Labs is another specialty pharmaceutical company. Its portfolio of drugs includes products that treat depressive and anxiety disorders, Alzheimer's disease, hypertension, fibromyalgia, and pneumonia. Allergan is a more broadly-based company that sells specialty pharmaceuticals as well as medical devices.

Bottom line here for investors is that the march toward Ireland by U.S. companies will continue, especially by pharmaceutical companies. That is, until either the Irish or U.S. corporate tax rates are changed.

President Obama isn't the only leader trying to fight corporate tax rates: Corporate Tax Avoidance in the Crosshairs of OECD Plan

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