As seed and chemical giant Monsanto continues its acquisition effort of Swiss competitor Syngenta, an international move might be in the works for the St. Louis-based corporation’s headquarters.
In correspondence recently released by Syngenta, Monsanto executives propose to combine the two companies under a third parent company, which would be located in the United Kingdom. That could indicate Monsanto is ready to push ahead on a tax planning strategy called corporate inversion: moving a company’s headquarters to another country to lower tax obligations.
Radhakrishnan (Radha) Gopalan, PhD, associate professor of finance at the Olin Business School at Washington University in St. Louis, is an expert in corporate inversion and says the numbers tell the story.
“The biggest advantage of inversion is tax savings. This should be important in this case as well, as the marginal tax rate in the U.S. is 40 percent (including state and federal taxes) while it is 20 percent in the U.K.,” Gopalan said. “This will be a major savings for Monsanto, which had an effective tax rate of 28 percent in 2014.”
However, Gopalan’s research also shows there are risks to such a move: tax inversion lowers stock liquidity and lowers the market valuation of the firm’s shares, because corporate law applicable for the firm changes, and investors prefer U.S. state laws to foreign laws.
“In the case of Monsanto, it only had three institutional blockholders with more than five-percent ownership as of the end of last year,” Gopalan said. “In aggregate, the blockholders had about 16.5 percent of the shares. The rest of the shares are held by smaller shareholders who may not prefer the lower liquidity and lower valuation. This could affect the company’s ability to get its shareholders’ approval for the deal.”
For more information about Gopalan’s research, click here.