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 Looking back three decades at 52 completed transactions, the
review showed 19 of the companies have subsequently outperformed the
Standard & Poor's 500 index, while 19 have underperformed. Another
10 have been bought by rivals, three have gone out of business and
one has reincorporated back in the United States.
Among the poorest performers in the review were oilfield services
and engineering firms, all from Texas. Among them was the first of
these companies to invert, McDermott International Inc <MDR.N>,
which moved its tax home-base to Panama in 1983.
Drugmakers are dominating the latest wave of inversions and most of
them have outperformed the benchmark index. So far in 2014, five
U.S. pharmaceutical firms have agreed to redomicile to Ireland,
Canada or the Netherlands. Deals that have not been completed were
excluded from the review.
It is impossible to know how the companies might have fared in the
market had they not inverted. Innumerable factors other than taxes
influence a stock's performance, and no two of these deals are
identical, complicating simple comparisons.
But the analysis makes one thing clear: inversions, on their own,
despite largely providing the tax savings that companies seek, are
no guarantee of superior returns for investors.
 The deals basically involve a U.S. company initially forming or
buying a foreign company. Then the U.S. company shifts its tax
domicile out of the U.S. and into the foreign company's home
country. The name "inversion" comes from the idea of turning the
company upside down, making a smaller offshore unit the new head and
the larger U.S. business the body.
Companies that do these deals typically promise shareholders will
benefit. But aside from stock price underperformance by many,
inversions can also impose substantial up-front tax costs. When a
deal occurs, investors must recognize any taxable capital gains on
their stockholdings. These costs are not taken into account in the
study as they differ for each shareholder and don't apply in some
cases.
"For some companies, these inversions are really smart business
moves. For others, they're less smart ... You don't always know if
it's going to work," said James Hines, professor of law and
economics at the University of Michigan and one of a handful of
academics who have closely studied these deals.
TAXES AND TEXAS
Corporations that invert say they are only seeking to pay the lowest
tax rate they can get, noting this is what shareholders would expect
them to do.
Inversion was pioneered as a strategy by oilfield companies that
reincorporated chiefly in the Cayman Islands, Bermuda and Britain.
Most have lagged the S&P500 since their inversions were completed:
McDermott by 85 percent; Rowan Cos Plc <RDC.N> by 35 percent;
Transocean Ltd <RIG.N> by 18 percent; among others.
These oilfield stocks also largely underperformed narrower Thomson
Reuters and Dow Jones oil and gas equipment and services sector
indexes, looking as far back as index data allows.
McDermott did not reply to questions sent to the company. Transocean
did not respond to requests for comment.
 A Rowan spokeswoman referred questions to the company web site. It
said the company's 2012 UK redomiciling "was designed to enhance
shareholder value," while putting Rowan closer to customers and
North Sea operations and enabling it to stay competitive "with the
effective tax rates of its global competitors, most of which are
domiciled outside the U.S."
Beyond oilfield services, the inversion strategy has been used by a
half-dozen U.S. insurance firms, with half of them outperforming and
the rest either acquired or out of business.
White Mountains Insurance Group Ltd <WTM.N>, managed from Hanover,
New Hampshire, has outpaced the S&P500 by 248 percent since
reorganizing in 1999 as a Bermuda corporation, for example. A
spokesman for the company said it had no comment.
INTENSE COMPETITION
The analysis, using Reuters data and analytics, measured simple
share price performance against the S&P 500 index using two
benchmarks - the date when each company completed its inversion
deal, and the date when each deal was announced.
With only four exceptions, the inverted companies that were still in
business since doing their deals either uniformly underperformed or
outperformed on both benchmarks.
For instance, U.S. engineering and construction group Foster Wheeler
AG <FWLT.O> announced in November 2000 - when its stock was worth
about $45 per share - that it was inverting to Bermuda. The deal, a
statement said, was "expected to benefit Foster Wheeler and its
stockholders for several reasons."
Since the announcement, the company's stock has lagged the S&P 500
by 50 percent; since the deal was concluded in May 2001, it has
trailed the index by 83 percent. Foster Wheeler agreed in January
2014 to be acquired by UK rival Amec Plc <AMEC.L> for about $32.69
per share in Amec stock and cash at the time. The deal is expected
to close in the fourth quarter.
Foster Wheeler spokesman Scott Lamb said the company dealt with weak
markets, several problematic projects and a major debt restructuring
after it inverted to Bermuda. It recovered and so did its stock
price, but the 2008 economic downturn, he said, brought "an extended
period of moderate demand and intense competitive pressure. These
conditions have adversely affected the performance of all of the
companies in this sector."
Also, in the past decade, he said, the company's revenue and
employment base have largely shifted out of North America.
"HERD MENTALITY"
Concern is growing in Washington about inversions. President Barack
Obama has criticized a "herd mentality" by companies seeking deals
to escape U.S. corporate taxes.
Of the 52 inversions and similar redomiciling deals done since 1983,
22 have occurred since 2008, with 10 more being finalized and many
more said to be in the works.
Following recent deals by major companies such as Medtronic Inc
<MDT.N>, bankers and analysts have said that another burst of deals
is waiting to be unveiled in September.
Congressional action this year is unlikely with Republicans so far
opposing Democrats' proposals, analysts said, though the Obama
administration has been weighing executive actions.
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For instance, the White House may announce tighter restrictions on
federal government contracting with inverted companies, said Chris
Krueger, an analyst at Guggenheim Securities in Washington in a
research note last week.
Inversions have a firm legal basis. The government has been writing
rules on them for 30 years. But they are complex and risky and some
major proposed deals have recently unraveled.
On August 6, for example, after months of internal debate and public
criticism from politicians, U.S. retailer Walgreen Co <WAG.N> said
it would not reincorporate in Europe. It was considering using its
purchase of Europe's Alliance Boots Holdings <ABN.UL> for such a
maneuver.
Drugmaker Pfizer Inc <PFE.N> and advertising firm Omnicom Group Inc
<OMC.N>, U.S. leaders in their industries, have also walked away
from planned inversions in recent months because they couldn't reach
deals with their targets. "EARNINGS STRIPPING"
No two inversions are identical and they have changed shape along
with evolving U.S. Internal Revenue Service (IRS) rules.
One appeal of inversions is putting foreign profits out of the IRS's
reach. Another is "earnings stripping," in which a foreign parent
lends to a U.S. unit, which deducts the interest to shrink its U.S.
income for tax purposes, while the foreign parent books the interest
at its home country's lower tax rate.
Inversion destinations have lower corporate tax rates than the
United States. The top U.S. rate of 35 percent is among the world's
highest. Add state and local taxes and, in much of the United
States, the headline corporate rate is even higher.
 Still, many U.S. companies pay far below that headline rate because
of abundant loopholes that give businesses, especially big ones, a
lower effective tax rate.
Inverting usually does not mean a U.S. company fully decamps from
home. In most cases, it means opening a foreign office, but leaving
core operations in the United States.
"NAKED INVERSIONS"
Inversions underwent a major change in 2004 when the IRS adopted a
rule - Section 7874 of the tax code - that slapped new limits on the
deals, making them harder to do.
Pre-7874 deals were sometimes known as "naked" or "self-help"
inversions. One example was Helen of Troy Ltd <HELE.O>, an El Paso,
Texas consumer products group that sells hair dryers, kitchenware
and other goods. In 1994, the company set up a Bermuda holding
company and simply transferred its tax domicile into it. Since then,
Helen of Troy has outperformed the S&P 500 by 219 percent. The
company declined to comment.
Deals like this continued through 2002, involving groups as diverse
as manufacturer Ingersoll Rand Plc <IR.N>, which has outperformed
the S&P500 by 103 percent since inverting in 2001, and underwear
maker Fruit of the Loom. An Ingersoll Rand spokeswoman declined to
comment.
Fruit of the Loom inverted to the Cayman Islands in 1998-1999. Three
years later, it was bought out of bankruptcy by Berkshire Hathaway.
In 2004, Section 7874 was adopted in response to naked inversions.
It set two tests for whether an inverted company is recognized as
foreign or domestic by the U.S. government.
EATON AND COOPER
Since Section 7874, most inversions, though not all, have involved
the acquisition of actual, operating foreign companies, with the
costs, opportunities and challenges that can present.
For instance, Cleveland, Ohio's Eaton Corp Plc <ETN.N>, a maker of
power management products, in 2012 moved its tax domicile to low-tax
Ireland by acquiring Cooper Industries, itself an inverted company
that reincorporated from the United States to Bermuda in 2002 and
then Dublin in 2009.
"The acquisition of Cooper was a strategic decision to add scale and
breadth to our global electrical business ... The acquisition of
Cooper was transformational for our business," said Eaton spokesman
Scott Schroeder in emailed comments.
When the deal was announced, Eaton Chief Executive Sandy Cutler said
it would shave about $160 million off Eaton's annual tax bill. He
said business motivations, not tax reductions, were the key reasons
for the transaction.
Eaton's effective tax rate in 2013 was only 0.6 percent, down from
2.5 percent in 2012 and from 12.9 percent in 2011, said Eaton's 2013
annual report to federal regulators.
"The lower effective tax rate for 2013, compared to 2012, was
primarily attributable to the effects associated with the
acquisition of Cooper, along with greater levels of income in lower
tax jurisdictions and additional foreign tax credit utilization,"
Eaton said in the Securities and Exchange Commission filing.
Despite the tax savings, Eaton has underperformed the S&P 500 by 5
percent since completing the Cooper deal in November 2012. But,
measuring from the day when the deal was announced in May 2012,
Eaton's share price has outperformed the index by 9 percent, Reuters
data showed.
The first U.S. drug company in the 52 to complete an inversion was
biotechnology group Xoma Corp <XOMA.O>, which shifted to Bermuda in
1998. Thirteen years later, the company returned its tax domicile to
the United States, saying in a statement it wanted to reduce
exposure to possibly adverse tax legislation and to come back to a
more familiar legal system.
 Xoma has posted losses since 2010 and, despite returning to
California, has underperformed the S&P500 by 95 percent since it
went to Bermuda. A spokeswoman said Xoma had no comment.
(Editing by Amy Stevens and Martin Howell)
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