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Wednesday was a rough day for Walgreens (NYSE: WAG) and its investors. The company declared earnings that morning. But the real story for Walgreens stock wasn’t the company’s earnings.
Indeed, the 14.3% drop in the price of Walgreens stock had little to do with the company’s earnings. It did, however, have everything to do with news that Walgreens will no longer attempt a tax inversion.
The company also lowered its guidance for the next quarter, which is never a good sign.
Back in 2012 Walgreens paid $6.7 billion to acquire 45% of British drugstore chain Alliance Boots. As part of the agreement Walgreens secured the right to buy the rest of the chain within a three-year period. Walgreens announced Wednesday that it will exercise its option and buy the remainder of Alliance Boots.
Activist investors had been trying to get Walgreens to complete its acquisition of Alliance Boots. But they wanted Walgreens to then restructure the company and shift headquarters overseas to avoid paying U.S. corporate taxes.
This process is called a tax inversion.
The real let-down for investors, the reason Walgreens stock was crushed by more than 14%, was Wednesday’s announcement that the company would no longer pursue a tax inversion as part of the Alliance Boots deal.
Walgreens’ plan now is to acquire the remaining 55% of Alliance Boots with a mix of cash and stock. The mix would include around $5.27 billion in cash and 144.3 million shares with an approximate value of $10 billion before Wednesday’s plunge.
This makes the total value of the acquisition to around $22 billion. The new company will remain headquartered in the Chicago area and will become the world’s largest distribution and wholesale network of pharmaceuticals.
Operating 11,000 stores across 10 countries, the company will be a force to be reckoned with when it comes to drugstores.
But investors are clearly unimpressed by the move.
By moving its headquarters overseas Walgreens would’ve invited political pressure as well as legal pressure from the US government, particularly the IRS. Instead of completing a tax inversion to reduce costs, Walgreens said it will focus on cost controls and aim to reduce costs by $1 billion by 2017.
It is undeniable that Walgreens would’ve realized considerable tax savings by moving out of the US. The real question is what unintended consequences would’ve accompanied such a move.
With political pressure mounting against companies that have recently moved their headquarters overseas, this decision by Walgreens could prove to be nothing short of prudent.
Walgreens stated that it had researched the tax inversion extensively and decided against it. The company cited the potential for a long and expensive battle with the IRS as well as potential damage to the company’s “iconic” American brand.
Only time will tell whether this move was the right one. If Walgreens is able to achieve meaningful cost reductions and the U.S. government is able to punish companies that have completed tax inversions, Walgreens will likely be rewarded in the long term.
But for now, Walgreens stock has taken a hit and investors are clearly disappointed with the company. It’s clear that investors were hoping for a tax inversion.
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