NEW YORK (TheStreet) -- AbbVie (ABBV) finally agreed to terms for a $54.8 billion buyout of Shire (SHP) Friday. In the process, AbbVie has become the largest U.S company to ever take over a foreign company in a bid to lower its tax rate, a move known as inversion. This was the fifth offer AbbVie had made to Shire before being accepted.
Irish companies have become a hot-bed of activity recently as U.S corporations use the much lower Irish tax rate to play accounting games and reduce their tax exposure. And TheStreet's John Mason analyzed the growing practice of inversion yesterday.
But is this move a good idea for the companies, aside from the tax rate?
The Shire buyout is expected to reduce AbbVie's tax rate from 22% to 13%, no small amount given the size of the combined company after the merger.
But according to AbbVie CEO Richard Gonzalez, "This is a transaction that we believe has excellent strategic fit, well beyond the tax impact. We wouldn't be doing it if it was just for the tax impact."
And there is merit in the AbbVie "strategic fit" argument.
AbbVie will benefit from Shire's revenue right away. Shire projects its revenue will double by 2020 to $10 billion. With $5 billion in revenue for the last year, Shire has posted 17% year-over-year quarterly revenue growth. Levered free cash flow is very strong for Shire, coming in at over $1 billion last year.
This added cash flow could be used by AbbVie to easily increase the dividend it pays, currently $1.68 per year -- a 3% yield. As of now, AbbVie pays out 53% of its annual earnings per share in dividends. With the deal expected to be positive for EPS, along with the extra free cash flow, a bonus to this merger could be an increase in the dividend.
This deal will also help AbbVie to reduce its reliance on its blockbuster arthritis drug Humira, which loses patent protection next year.
Shire brings to the table a portfolio of drugs in the rare disease market. Those drugs are attracting more attention in recent years. Shire is a leader in the ADHD market, with the leading drugs Adderal XR, Intuniv and Vyvanse. These drugs helped generate almost 40% of the company's revenue last year. The combined company will now have 15 drugs in Phase 3 trials.