Your Inversion Is Germany's Takeover
The U.S. Treasury Department's action against tax inversions won't keep all U.S. companies from lowering their tax bills through foreign mergers. Many companies that have been looking for ways to reincorporate abroad will instead become more amenable to takeovers by foreign corporations, whose appetite for U.S. business is growing.
German companies especially have been on a buying spree in the U.S. Billion-dollar deals involving a German acquirer and a U.S. target announced so far this year include:
- Merck KGaA's planned takeover of life-science equipment maker Sigma-Aldrich Corp. for $16.4 billion in cash
- Bayer AG's offer of $14.2 billion for Merck & Co. Inc.'s consumer care business
- ZF Friedrichshafen AG's purchase of car part maker TRW Automotive Holdings Corp. for $12.8 billion
- Siemens AG's acquisition of oilfield equipment maker Dresser-Rand Group Inc. for $7.5 billion
- SAP AG's purchase of expenses software developer Concur Technologies Inc. for $7.2 billion; Infineon Technologies AG's takeover of power circuitry maker International Rectifier Corp. for $2.3 billion
- Continental AG's acquisition of Veyance Technologies Inc., which makes auto components, for $1.9 billion
German companies have already spent more in the U.S. in 2014 than in any full year in the past two decades. Add other Europeans -- Sweden's Electrolux, which is picking up GE's appliances business; Switzerland's Roche, investing in lung medicine start-up InterMune; U.K. tobacco companies poaching U.S. cigarette brands -- and you have a major boom in European acquisitions. So far this year, according to data compiled by Bloomberg, 709 such deals worth a total of $140 billion have been proposed, compared with 835 deals for $183 billion in which U.S. companies are the buyers of European businesses. Who says Europe's economy is feeble compared to the U.S.?
The Europeans have their reasons to be interested in U.S. companies. As their home markets stagnate, they have to rely on exports and internationalization in order to grow. The euro has been strong recently, making U.S. acquisitions more attractive, but the European Central Bank's policies are driving the currency down, and companies want to move while the prices are relatively low. German exporters have the cash on hand and the available credit to buy coveted technologies.
There are two sides to every deal, of course, and U.S. company shareholders have their reasons for selling. One of them -- though perhaps not the biggest -- is the U.S. tax system. At least one of the companies recently acquired by Germans, Sigma-Aldrich, was recently mentioned as an inversion candidate. Now, its tax optimization will be Merck's headache. Germany has a high effective corporate tax rate -- just under 30 percent -- but the EU, borderless for business purposes, has plenty of friendlier jurisdictions.
The Treasury Department's fact sheet on its new inversion rules says the U.S. government has nothing against "genuine cross-border mergers": they "make the U.S. economy stronger by enabling U.S. companies to invest overseas and encouraging foreign investment to flow into the United States." Indeed, the European cash goes to the acquired companies' U.S. shareholders, who pay tax on the transaction. The end result of "genuine" deals, however, is the same for purely tax-motivated ones: Companies pay U.S. taxes only on their American business. The U.S. government cannot get its hands on their overseas cash.
The Treasury has closed some inversion-related loopholes. It will now be more difficult for U.S. companies to lend overseas cash to new overseas parents or to sell them their cash-accumulating subsidiaries. It will also be hard to make foreign companies look bigger and U.S. ones smaller to pass off an inversion deal as a genuine foreign takeover. None of the new strictures, however, will apply to the European purchases.
U.S. policy makers need to be consistent. If their goal is for U.S. companies to stay in American hands so they can be taxed on their foreign as well as U.S. operations, they need to make all cross-border acquisitions difficult -- an ugly measure that would destroy the U.S.'s reputation as an open economy. If, however, their goal is to keep U.S. firms nimble, competitive and acquisitive, they should relax tax rules and perhaps even let firms pay taxes only to the countries where their business is conducted.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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