Englewood, Colorado-based IHS Inc. (IHS) announced Monday that it would combine with London-based Markit Ltd. (MRKT) in a "merger of equals" to form a $13 billion company based in the U.K. The transaction has drawn attention for being a corporate inversion, a practice by which U.S. companies merge with foreign entities to move their tax base to a cheaper jurisdiction.
In a press release Monday, the data providers said the combined entity would be called IHS Markit and that it would serve over 50,000 customers, including three quarters of the Fortune Global 500. They said that, since many of these customers do not overlap, the merger would be immediately accretive to adjusted dilutive EPS, with growth around 20% in 2017 and in the mid-teens the following year. Cost synergies are expected to total $125 million by mid-2019, and the corporate tax rate is expected to be in the "low- to mid-20 percent range." The company plans to repurchase $2 billion in shares by the end of 2018.
IHS Chairman and CEO Jerre Stead will serve as the new company's chairman and CEO, while Markit Chairman and CEO Lance Uggla will be president and have a seat on the board. He will then replace Stead as chairman and CEO at the beginning of 2018. Markit will appoint five of 11 board seats, including the lead director, and IHS will appoint six. IHS shareholders will control 57% of the combined company, Markit shareholders 43%. The deal values Markit shares at $31.13, compared to a Friday closing price of $29.49. At the time of writing, Markit stock trades at $33.88, 15% higher than Friday's close. IHS stock has risen 11% to $123.28 in the same period.
Is It an Inversion?
While the deal is an inversion on its face, IHS enjoyed a fairly low tax rate of 20.5% in the year through November. If the companies' estimate of their future tax burden is correct, the deal would not lower the rate by much and so may not attract as much scrutiny or criticism as prior inversions. An unnamed source involved in the deal told the Wall Street Journal that the merger is motivated by strategic considerations, not just taxes, so it shouldn't draw too much attention from Washington.
Presidential hopeful and Vermont Senator Bernie Sanders addressed the issue of inversions Friday, sending a letter to Treasury Secretary Jack Lew asking him to take measures to prevent Pfizer Inc. (NYSE: PFE) from merging will Allergan PLC (NYSE: AGN) in order to move its tax base to Ireland, calling the move "nothing less than a tax scam." Sanders' proposals – short of legislation to tax inverted corporations as American ones – include rules to prevent "hopscotch loans," through which inverted companies repatriate foreign earnings tax-free by presenting them as loans, and "earnings stripping," through which companies shift profits to subsidiaries in low-tax jurisdiction. (See also, New Treasury Rules Won't Stop Corporate Inversions.)
Donald Trump has also expressed a desire to stop inversions. His approach is to lower the maximum corporate tax rate from its current 35% to 15%, removing the incentive to move to other countries. (See also, An America With Donald Trump as President.)
Clinton criticized the inversion of Milwaukee-based Johnson Controls Inc. (JCI), which announced in January that it would buy Ireland-based Tyco International PLC (TYC) and move its headquarters to Cork. Tyco's CEO, who works out of Mahon, Ireland, will move to Milwaukee. Clinton called the move "outrageous" and said her plan would "immediately put a stop" to the practice through an exit tax and a 50% ownership threshold to determine nationality (the majority of Pfizer and Allergan shareholders would be in the U.S., according to Sanders' letter). (See also, Johnson-Tyco Merger is a Pure Inversion.)
The Bottom Line
IHS and Markit's merger may be an inversion in a technical sense, but it will probably not reduce the combined company's tax burden by much, and apparently responds more to strategic considerations than the tax bill. The move may still generate controversy, however, given that inversions – Pfizer's in particular – have become a talking point for presidential candidates in both parties during a contentious election cycle.