'Inversions' to save on U.S. taxes not always a big plus for investors

Establishing a tax domicile abroad to avoid U.S. taxes is a hot strategy in corporate America, but many companies that have done such "inversion" deals have failed to produce above-average returns for investors, a Reuters analysis has found.

Looking back three decades at 52 completed transactions, the review showed 19 of the companies have subsequently outperformed the Standard & Poor's 500 index, while 19 have underperformed. Another 10 have been bought by rivals, three have gone out of business and one has reincorporated back in the United States.

Among the poorest performers in the review were oil field services and engineering firms, all from Texas. Among them was the first of these companies to invert, McDermott International Inc., which moved its tax home base to Panama in 1983.

Drugmakers are dominating the latest wave of inversions, and most of them have outperformed the benchmark index. So far in 2014, five U.S. pharmaceutical firms have agreed to redomicile to Ireland, Canada or the Netherlands. Deals that have not been completed were excluded from the review.

It is impossible to know how the companies might have fared in the market had they not inverted. Innumerable factors other than taxes influence a stock's performance, and no two of these deals are identical, complicating simple comparisons.

But the analysis makes one thing clear: Inversions, on their own, despite largely providing the tax savings that companies seek, are no guarantee of superior returns for investors.

The deals basically involve a U.S. company forming or buying a foreign company, then shifting its tax domicile into the foreign company's country. The name "inversion" comes from the idea of turning the company upside down, making a smaller offshore unit the new head and the larger U.S. business the body.

Companies typically promise shareholders will benefit. But aside from stock price underperformance by many, inversions can impose substantial upfront tax costs. When a deal occurs, investors must recognize any taxable capital gains on their stock holdings. These costs were not taken into account in the study as they differ for each shareholder and don't apply in some cases.

"For some companies, these inversions are really smart business moves. For others, they're less smart . . . You don't always know if it's going to work," said James Hines, professor of law and economics at the University of Michigan and one of a handful of academics who have closely studied these deals.

The Obama administration has been weighing executive actions to discourage inversions.