Shares of about a dozen companies contemplating “tax inversion” mergers or acquisitions dropped on Tuesday after President Obama announced that the IRS would be changing regulations to reduce the benefits of such deals, Reuters says.
“For at least 10 companies in the midst of completing such deals, and for those considering inversions, the impact will be significant,” Reuters reports. That includes, for instance, Burger King, which saw its stock drop about 2.5 percent, and medical-device firm Medtronic, which saw its stock drop around 3 percent. That might not sound huge, but in both cases, it’s ten figures of shareholder value, and it could get worse, since it’s still not quite clear what the impact of the regulations would be.
The fact that the Obama administration did the rule by executive fiat, rather than letting Congress handle the issue, is also causing particular pain. The new rule isn’t going to be retroactive — Senator Chuck Schumer, surely America’s worst senator, wanted to undo the benefits of such deals going back to 1994, while Obama had suggested just a few months of ex post facto regulation — but it will apply to deals currently under consideration but not completed. A large corporate merger or acquisition like Burger King or Medtronic are considering, though, is a complicated process, and once you’ve started it, it costs money to stop it — there’s literally something called a breakup fee, and it’s really substantial. U.S. firm AbbVie, for instance, will have to pay $1.6 billion to the Irish firm Shire, for instance, if it abandons its acquisition proposal.
The kicker? At least one of these potential deals, the one involving Medtronic and Irish firm Covidien, has a clause where the breakup fee can be avoided if tax circumstances change — but only if Congress changes tax laws.