Initial investor reaction to the specifics of the merger between Walgreen Co. and Alliance Boots GmbH was intense disappointment, as shareholders drove down Walgreens’ stock price by 18% in two days.


Walgreens, inversion, Alliance Boots, Greg Wasson, Internal Revenue Service














































































































































































































































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In the end, Walgreens decides against inversion

August 25th, 2014

NEW YORK – Initial investor reaction to the specifics of the merger between Walgreen Co. and Alliance Boots GmbH was intense disappointment, as shareholders drove down Walgreens’ stock price by 18% in two days.

Mounting speculation had swirled in the financial press about the form the deal would ultimately take as a result of intense pressure from some large institutional investors to move the combined company’s headquarters overseas in order to avoid higher corporate income tax on overseas profits. That gambit, known as inversion, has become a popular tax dodge among corporations.

Inversion requires a domestic company to merge with a foreign firm and reincorporate abroad, even if it continues to conduct most of its business and derive most of its revenues from the United States. Recent press coverage of such transactions has roused the ire of some politicians and the interest of the Internal Revenue Service.

It has also sparked some public backlash, including a story in The New York Times titled “Walgreens: Renouncing Corporate Citizenship,” which pointed out that the company obtains more than $16 billion, or about 25%, of its $72 billion in annual revenues from the government in the form of Medicare and Medicaid payments. The article concluded that an inversion move by Walgreens would be “an affront to United States ­taxpayers.”

Not surprisingly, then, Walgreens management explained in considerable detail why it decided to remain headquartered in this country. The original option transaction, executives pointed out, would not have qualified for inversion under present tax rules. Consequently, the transaction would have to have been restructured in order to win IRS approval.

A special committee of independent directors was formed which, with the help of outside advisers in tax policy and inversion transactions, examined the feasibility of such a move.

“We undertook an extensive and rigorous analysis with a team of leading experts to determine the most optimal — and sustainable — course of action,” said president and CEO Greg Wasson. “We took into account all factors, including that we could not arrive at a structure that provided the company and our board with the requisite level of confidence that a transaction of this significance would need to withstand extensive IRS review and scrutiny. As a result, the company concluded it was not in the best long-term interest of our shareholders to attempt to re-domicile outside the U.S.”

During a conference call with analysts, Wasson went on to say that inversion might have left Walgreens in a significantly worse position than if it avoided that course. IRS scrutiny, he noted, could result in litigation that might last from three to 10 years, raising havoc with ordinary tax and business planning.

The company could also be subject to dual taxation in the intervening years, resulting in back taxes due with interest and penalties. Finally, possible consumer backlash of an unpredictable scale, as well as political repercussions resulting in lost business with the government, helped sway the decision.

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