The 287 transactions also represented a 30.5% increase in deal volume over the second quarter of 2013 and 22.1% over the previous quarter—a sure sign that momentum is picking up again after a lull that persisted throughout last year. But it was the prices paid for those transactions that lifted eyebrows about the rejuvenation of M&A activity by pointing to potential tax changes being discussed in Washington.
For companies that already enjoy a low effective tax rate, the benefits of moving their headquarters overseas include being able to move cash back into the U.S. without a tax penalty. About $2 trillion is held offshore by U.S. companies, and the portion held by pharmaceutical and medical-device companies is in the “hundreds of billions,” said Martin Sullivan, chief economist at Tax Analysts. “They want to unlock their trapped foreign profits,” he said. “This gives them a platform for future growth for their own M&A and they also become a target themselves.”
To get the benefits of a “tax inversion” deal, a U.S. company's shareholders must own less than 80% of the combined entity. The string of deals came after President Barack Obama's March budget proposal suggested tightening that threshold to 50%.
Pfizer in April set the tone when it launched a record-setting bid for London-based competitor Astra-Zeneca. The initial $101 billion offer topped even the $90 billion the New York-based drug giant paid to buy Warner-Lambert in 2000.
The deal was notable not only for its size, but because it would allow Pfizer to shift its headquarters to the U.K., where it could take advantage of lower tax rates. AstraZeneca fought off the unsolicited advance.
Pfizer bumped up its offer to $119 billion, but ultimately had to abandon the deal after it failed to convince AstraZeneca of its merits. British law now mandates a three-month cooling-off period before Pfizer can try again. Because the deal is no longer on the table, the $226.5 billion in M&A value tracked in the report does not include Pfizer's bid.
Still, other drug and technology companies quickly followed Pfizer's lead, driving up the total.
Two other tax-driven deals—where a U.S.-based company went shopping across the Atlantic—followed weeks later. Minneapolis-based Medtronic will pay $42.9 billion to buy Dublin-based Covidien and shift its headquarters abroad. And AbbVie, in North Chicago, Ill., this month increased its unsolicited offer for Shire, also based in Dublin, to $53.7 billion, prompting Shire to finally enter takeover talks after rejecting lower offers.