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US Shares To Open Lower As Inversion Crackdown Threatens M&As

Published 23/09/2014, 11:11
Updated 03/08/2021, 16:15

US markets had a rough start to the week after the Dow fell off by triple digits yesterday with the outlook for China’s economy deteriorating and a downturn in the US housing market rattling investors.

Major benchmarks look weak this morning ahead of the release of PMI data at home and abroad not helped by a crackdown by the US treasury on inversion deals that could put a halt to this year’s M&A boom.

Futures suggest the Dow Jones will open 34 points lower at 17,138 with the S&P 500 expected to open 6 points lower at 1,988 and the NASDAQ Composite16 points lower at 4,045.

Healthcare stocks in the UK and Ireland have sold off sharply on the announcement that the US Treasury will take actions against inversion deals designed to reduce the amount of tax US corporations will pay by moving headquarters offshore to a lower tax jurisdiction.

The low tax rates of the UK and Ireland have attracted deals especially in the pharmaceutical sector including AbbVie Inc (NYSE:ABBV)’s successful takeover of Shire Plc (LONDON:SHP) and Pfizer Inc (NYSE:PFE)’s attempted takeover of Astrazeneca Plc (LONDON:AZN).

There is some evidence to suggest that large companies had been given the nod these rules might be coming into effect with Walgreen Co (NYSE:WAG) recently choosing not to invert in its deal with Alliance  (LONDON:ALAPH) to avoid regulatory scrutiny.

The final tipping point for lawmakers on whether to introduce the changes to the tax code was likely the prospective deal between Burger King (NYSE:BKW) and Tim Hortons Inc. (NYSE:THI) which would have seen the iconic American fast-food restaurant become Canadian.

The new rules would apply to deals closed after today and as such should not impact already completed deals including the Abbie takeover of Shire. America’s top companies may choose not to face up against the IRS but it’s questionable how much power the US has to stop the practise when it involves a foreign company and associated foreign laws.

The tax inversions are clearly not good for the US economy but rather than complicating the law even further and engaging in a France-like intervention in the free market, US officials might have been better simplifying the tax code as well as lowering corporation tax to keep its top companies.

The US trading session sees more housing data with the Housing Price index expected to show an increase of 0.4% in the month and the release of the Markit Manufacturing PMI for the US expected to rise to 58 from 57.9 for September.

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