Tax games of phantom firms

Years ago, in 2006, this column coined the expression ‘ghost estates’ after a drive from Castlebar to Dublin, where I saw row after row of these estates being built outside provincial villages. That year, over 90,000 houses were built in Ireland. I had no idea that this expression ‘ghost estate’ would find its way into the sorry lexicon of the era, but it did.

I wonder will the notion of ‘ghost companies’ have the same ring to it? A ghost company is a phantom legal entity set up with the explicit aim of avoiding taxes. It is the spooky, empty headquarters’ of a large company set up in Ireland which isn’t the headquarters of the company in reality but serves the purposes of having headquarter-style basic infrastructure, headed notepaper, a few exiled executives and a skeleton staff.

For the sake of the natives and good corporate PR, the ‘ghost company’ will make a minuscule jobs announcement – safe in the knowledge that this will be picked up by the national press and will disguise the real motive.

It may well have board meetings here. Sure, why not, since the hotels are nice, the golf is good and Dublin is a happening city with decent restaurants and great bars. The company may even spend a few quid to list on the Irish Stock Exchange and raise a bit of cash, if it feels like it here. But, in essence, the company is no more domiciled here than it is in Timbuktu. It’s a ghost company set up to pay a global tax game.

Earlier this week, the Financial Times published a brilliant article about how large companies, and particularly pharmaceutical companies, are avoiding billions of dollars of taxes by domiciling themselves in Ireland and then deploying the talent of smart Irish lawyers and accountants to set up grubby little arrangements that allow to them route profits through Ireland, the Netherlands and Bermuda, taking the mickey out of the US tax authorities in the process.

These are Ireland’s ghost companies.

Obviously the lower the tax these companies pay, the higher the return to their owners. (Of course, the revenue they pay this low rate of tax on is itself coming, in huge part, from taxpayers’ money in the form of state healthcare spending.)

If real countries were serious about getting these ghost companies to pay their fair share of tax, they could debar their health services from buying their medicines from the most egregious tax avoiders. I suspect this would put manners on them in jig time.

In time, the US authorities, needing the revenue, will act against these ghost companies but for the moment, let’s focus on what is happening in the huge pharmaceutical industry and how this is a microcosm of the global economy, exacerbating the equality dilemma.

Unless you’ve been living under a rock for the past several months, you’ll be aware that the latest manifestation of the global stock bubble is that pharmaceutical companies are using their overvalued stock prices as currency. They are buying other companies with this currency.

There has been an unprecedented merger and acquisition binge. Companies are buying up targets either to domicile themselves abroad and thus avoid paying US corporate taxes, or simply to buy up assets before someone else snatches potential targets, in a classic case of FOMO (Fear Of Missing Out) move. This mania is the corporate equivalent of getting on the property ladder. The sale of Elan last year was part of this process.

Here are a few highlights of the current deal frenzy.

• US giant Pfizer, in an apparent u-turn on organic growth/rationalisation, is potentially looking to buy the Anglo/Swiss pharma company AstraZeneca for $100 billion. The strategy is rapid growth via acquisition.
• The French company Novartis and Britain’s Glaxo are merging in a deal said to be worth $25 billion.
• The Swiss giant Sanofi is looking to offload $7-$8 billion of its older drug portfolio assets.
• Valeant, with private equity backing, is bidding around $50 billion for the fake boob and botox maker, Allergan. (Incidentally the original ghost estate column was written following a visit to Allergan’s factory in Castlebar.)
• Meda has rejected a $6.5 billion all-stock offer from Mylan.

And while this acquisition spree is a boon for shareholders, with the euphoric market rewarding both target and acquirer by sending their stock prices immediately higher, it is also great news for investment bankers, lawyers and accountants who are putting these deals together.

However, there is one group that is getting shafted: employees.

As the WSJ reports, when it comes to drug mergers, the stock price may rise and fall, but one thing is certain: layoffs. Take the case of Pfizer. According to the Wall Street Journal, since 2005, Pfizer has eliminated more than 56,000 jobs worldwide – a number roughly equal to the population of Limerick city.

And if indeed Pfizer pulls off its proposed headquarters-shifting acquisition of AstraZeneca, which is set to be the largest pharma M&A deal in history at $106 billion, then the total workforce of the two companies is sure to be far smaller than the sum of the parts.

Pfizer said last week it would achieve “synergies” with the AstraZeneca deal if it comes to fruition, including in the combined companies’ businesses in cancer and cardiovascular drugs. Pfizer didn’t quantify the expected savings.

Pfizer has squeezed cost savings out of past megamergers. After its $68 billion acquisition of Wyeth in 2009, Pfizer closed six of 20 research sites worldwide, including in New Jersey, New York and North Carolina. In Ireland, Pfizer currently has more than 5,000 employees across 13 sites.

Pfizer is not alone. Job cuts also could result from other recently announced deals, including an exchange of assets between Novartis AG and GlaxoSmithKline and Novartis’s plan to sell its animal-health division to Eli Lilly.

The bottom line is that since 2009, the pharmaceutical industry has announced more than 156,000 job cuts in the US alone, according to Challenger Gray & Christmas, a company that big firms hire when they’re laying off employees, to help them find new jobs.

And what else is threatening employees? Why, the Federal Reserve, of course. How could this be?

The trillions of dollars of QE have bypassed the economy entirely but made their way straight into the stock market, pushing up share prices, driving up the great M&A currency. In addition, thanks to very low rates, the cost of debt is so low that if stock is not an attractive purchase currency, the buyer can simply fund the deal with ultra-cheap debt.

This has enabled shareholders and management teams to jump headfirst into the merger and acquisitions frenzy, in the process laying off thousands.

It’s not hard to see that a combination of tax avoidance, aided and abetted by QE, is leading to mass lay-offs, making the shareholders richer and the taxpayers and workers poorer.

This is a process which is exacerbating inequality and is masked by the corporate phantoms that are Ireland’s ‘ghost companies’.

David McWilliams writes daily on international economics and finance at www.globalmacro360.com

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