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Argent in the News

Nicklaus: Rush to low-tax countries is picking up speed

31 July 2014

(St. Louis Post Dispatch)

“Ken Crawford, a portfolio manager with Argent Capital Management in Clayton, says the appeal of an inversion is obvious to investors. The U.S. levies a corporate tax rate of 35 percent, among the highest in the world. Ireland charges just 12.5 percent, Switzerland 18 percent.”

June 27, 2014  (David Nicklaus)

By now, every chief financial officer in America has surely looked into ways to flee the country.

Shareholders are starting to expect it. They don’t want the CFO to move personally, but they do like seeing a company’s legal headquarters move overseas to save taxes.

Medtronic spent $43 billion to buy Covidien and turn Irish. Walgreens may go Swiss. Pfizer tried to become British.

This week, we learned that Monsanto held merger discussions with Syngenta in hopes of taking on its rival’s Swiss identity. Such a deal would face huge antitrust issues — it would combine two of the top three producers of U.S. seed corn — and is apparently off for now, but we shouldn’t be surprised that they were talking.

The race to do corporate inversions, in which a U.S. company buys an overseas firm and then moves its legal domicile to the foreign country, has become a modern-day land rush, with companies hurrying to do deals before Congress slams the door shut.

Steven Winoker, an analyst with Sanford C. Bernstein in New York, thinks Ferguson-based Emerson is among the companies that should be pursuing an inversion strategy.

In a recent report, he suggests that Emerson could invert by buying a company such as Eaton, which is managed from Cleveland but legally based in Dublin, Ireland. (It got there by buying Cooper Industries in 2012, a move it said would save $160 million a year in taxes.)

Alternatively, Winoker says, Emerson could buy Ingersoll-Rand, Tyco or Pentair, each of which has a legal base in low-tax Ireland. He also lists Honeywell and 3M as possible buyers but says Emerson “has the most to gain among our U.S. domiciled companies given their 30-plus-percent tax rate, and substantially all their cash held abroad.”

Emerson’s chief executive, David Farr, has complained in the past that high taxes put American companies at a disadvantage. The cash issue is an important one: U.S. companies have nearly $2 trillion in profits that they’ve booked overseas and are keeping there to avoid taxes.

Ken Crawford, a portfolio manager with Argent Capital Management in Clayton, says the appeal of an inversion is obvious to investors. The U.S. levies a corporate tax rate of 35 percent, among the highest in the world. Ireland charges just 12.5 percent, Switzerland 18 percent.

“To the degree that financially it makes sense, I’m surprised more companies have not done it,” he said. “It’s free money.”

Among Argent’s holdings are two Irish-domiciled drug companies, Mallinckrodt and Endo International. Mallinckrodt has a legal address in Dublin thanks to its former parent, Covidien, but its CEO and operating headquarters are in Hazelwood.

The recent flurry of tax-inversion deals is a big part of why Crawford likes Mallinckrodt and Endo. The companies can either make acquisitions themselves — bringing more business under their low-tax umbrellas — or be bought.

“Since we live in St. Louis, we would prefer Mallinckrodt be the doer of the deal,” he said. “But looking at valuation, we think the downside protection is that somebody might want Mallinckrodt for its tax rate.”

Some politicians don’t like this tax-dodging behavior. Sen. Richard Durbin, D-Ill., has said it amounts to “giving up on America.”

One could argue that our high taxes are the price companies pay for access to U.S. infrastructure, education system and capital markets. In the past two years, however, about 15 companies have decided that being American is more penalty than privilege. Look for many more to join their ranks.