Shire(LSE: SHP) andAstraZeneca(LSE: AZN) (NYSE: AZN,US) fell heavily on Tuesday, with Shire falling as much as 6% at one point, after it emerged that the US Treasury had introduced rules to stop so called tax inversion deals.
Astra and Shire have both been the targets of US companies seeking to shift their tax base overseas through inversions. Indeed, Shire agreed to a takeover by US drugs giantAbbVieearlier this year as the American group sought to relocate its tax base to the UK.
However, as details of the Treasurys plans were assessed by analysts, it became clear that inversion deals were not off the table just yet. There are ways for companies to work around the rules.
So, after yesterdays premature declines, is it time to buy in?
According to City analysts, rules introduced by the US Treasury, designed to stop inversions wont actually stop deals, although the new rules will make deals more complicated.
In particular, the Treasurys new ruleseliminated certain techniques companies use to gain tax-free access to overseas earnings. These rules became effective immediately,impacting transactions such as Shires, which have not closed yet.
Shifting tax base by effectively acquiring a foreign domicile, allows companies to shelter overseas income from the high US corporate tax rate of 35%. The UKs 2014 corporate tax rate is only 21%. So, its easy to see why companies would continue to peruse deals even if they become more complicated and expensive.
According to analysts, a way to get around the Treasurys rules has already been discovered. Specifically, the rules only apply to deals that are 80% foreign owned. This indicates that deals could still go through if less than 80% of the foreign entity was purchased.
Time to buy?
This is why it could be time to buy Shire and Astra after recent declines. You see, its likely that inversion deals will continue as companies circumnavigate the Treasurys new rules.
Actually, withShires shares currently trading just below AbbVies offer of 52.48 per share in cash and stock, it seems as if the City does believe that the deal will go ahead in its current form.
Whats more, Astra remains an attractive takeover target forPfizeras, even if inversionsbecome more complicated, Pfizer would save billions in tax from any deal. Despite the complications, a deal would be worth pushing through.
Of course, there is still a small risk that the US Treasury could ban inversions altogether. Nevertheless, even if a drastic move such as this were to go ahead, due to their defensive nature, Shire and Astra remain great long-term buys.
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Rupert does not own shares in any company mentioned.