Despite a wide expectation that it would, Walgreen Co. (NYSE: WAG) yesterday (Wednesday) announced it would not relocate its headquarters overseas as part of a tax inversion deal designed to avoid the high U.S. corporate tax rate.
However, Walgreens is following through on the acquisition itself - the purchase of the remaining 55% of Alliance Boots GmbH it doesn't already own.
Wall Street was not amused, lopping 14.5% from the WAG stock price. The aborted tax inversion deal wasn't entirely responsible for the backlash, as Walgreens also chopped its earnings guidance for 2016 to $4.25 a share from $4.60 - but it sure didn't help.
Tax inversion deals have drawn much fire recently from activist groups and politicians, including President Barack Obama, who recently criticized them as an "unpatriotic tax loophole."
But the attacks on tax inversion deals ignore the real problem: that Congress has failed to fix U.S. corporate tax law. Companies that seek to reduce their taxes are merely fulfilling their fiduciary responsibility.
"It's not un-American for these inversions to occur, it's just free market capitalism," said Money Morning Capital Wave Strategist Shah Gilani in an appearance yesterday on Fox Business' "Varney & Co." (See the accompanying video for more of Shah's thoughts on Walgreens' decision.)
In fact, the public pressure not to do the tax inversion was part of the calculus in the decision to keep the Walgreens headquarters in Chicago.
The negative attention surrounding tax inversions was making Walgreens nervous. It became increasingly clear that the company would pay a steep price with the American public if it moved its headquarters to cut its U.S. tax bill.
In a statement, Walgreens said its status as "an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs" was a significant factor in choosing not to go through with the inversion.
But there was another major consideration that weighed just as heavily on Walgreens executives - if not more.
The Walgreen Co. (NYSE: WAG) Tax Inversion Plan Just Didn't Work
Most tax inversion deals are straightforward. The U.S. company does an M&A deal with a foreign company and then moves its headquarters to the foreign country so it will be subject to its lower corporate tax rate (the U.S. rate is the highest in the developed world).
But the Walgreens deal with Alliance Boots isn't a typical acquisition. Walgreen already owns 55% of the company. And that threw a huge monkey wrench into any hopes of using it for a tax inversion.
Corporate inversions are subject to a complex set of rules, and the nature of the Walgreen-Boots deal raised concerns among executives that it would not "withstand extensive IRS review and scrutiny."
Restructuring the deal to ensure eligibility for a tax inversion possibly would have entailed starting from scratch - an option that appealed to neither Walgreens nor Boots.
Investors in WAG stock had good reason to be unhappy, though. As a retailer, Walgreens qualifies for few other tax loopholes. The company's 2013 taxes represented 37% of pretax income.
"The stock price did reflect a strong possibility of an inversion," Morningstar analyst Vishnu Lekraj told the Chicago Tribune. "The momentum within the market was building regarding an inversion, which had pushed the stock price higher."
Follow David Zeiler on Twitter: @DavidGZeiler.
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- Chicago Tribune: Walgreen CEO: Leaving U.S. Wasn't in Best Interest of Shareholders