Will AbbVie scrap Shire acquisition after tax inversion crackdown?

AbbVie Inc. is seriously considering abandoning the $55 billion acquisition deal with Shire plc after the US government’s crackdown on tax inversions.

The Chicago-based biopharmaceutical multinational’s Board will meet on October 20th to reconsider its recommendation to shareholders that they should approve the Shire takeover deal.

The US Treasury Department introduced changes to tax regulations on September 22nd, making it less financially advantageous for US companies to merge with foreign firms and then move their headquarters abroad where corporate taxes are lower.

The US has the highest corporate tax rates in the world.

AbbVie has been planning to buy Shire and move its legal domicile to the UK.

Abbvie Shire acquisition

AbbVie is one of many US-based companies trying to get away from the country’s high corporate tax rate.

In a statement on Wednesday, Shire confirmed that it had received notice overnight from AbbVie of its Board’s intention to reconsider the agreed acquisition deal.

AbbVie gave Shire no details of its tax assumptions, i.e. it did not quantify the anticipated financial impact of the US Treasury’s new tax regulations.

In a press release issued on Wednesday, Shire wrote:

“The Board of Shire believes that AbbVie should proceed with the recommended offer on the agreed terms in accordance with the Cooperation Agreement. The Board will meet to consider the current situation and a further announcement will be made in due course.”

“The Board of Shire notes that, in the event that the AbbVie Board adversely changes its recommendation and AbbVie stockholder approval is not obtained (or another triggering event occurs), a break fee of approximately $1.635 billion would be payable by AbbVie to Shire.”

Investors are surprised at AbbVie’s announcement, given that the firm had informed employees in September that Shire’s acquisition would go ahead.

Shire shares plunged 28% in early trading on the London Stock Exchange on Wednesday, following AbbVie’s announcement. Other UK-based pharmaceutical companies viewed as targets from US companies aiming to move out of the US, including AstraZeneca and Smith & Nephew, saw their share prices fall too.

Is US crackdown starting to work?

AbbVie’s statement is the strongest sign yet that the US government’s crackdown on tax inversion is starting to have the desired effect of discouraging companies from moving their headquarters abroad.

According to a study carried out by the Joint Committee on Taxation, a Congressional research panel with no partisan affiliations, the US Treasury is set to lose approximately $20 billion from inversions. This does not include potential losses in tax revenue from current deals that are underway.