Wall Street investors delivered a thumbs down Wednesday to Walgreens' announcement of a $15.3 billion plan to complete its acquisition of Europe-based Alliance Boots and decision not to pursue potential tax savings by shifting its headquarters overseas.
Shares of the nation's largest drugstore chain closed down more than 14.3% at $59.21 after the announcement.
The negative reaction came after Walgreens CEO Greg Wasson lowered the company's earlier financial guidance, forecasting revenue goals of $126 billion to $130 billion for fiscal year 2016, and adjusted earnings per share of $4.25 to $4.60 for that period.
During a conference call with Wall Street analysts, Wasson predicted that earnings before the deduction of interest, tax and amortization expenses would be "flat to a little up" through 2016.
Though he also forecast "an opportunity to continue to drive growth beyond this reset," and a cut in the company's effective tax rate from 36% to "the high 20s," the full financial picture appeared more downbeat than some investors and financial analysts expected.
Wasson partly blamed the gloomier outlook on a stepdown of reimbursements via the federal Medicare Part D program.
Addressing the issue of whether Illinois-based Walgreens should shift its headquarters to Switzerland as part of the Alliance Boots acquisition, Wasson said officials and expert advisers at both companies carefully analyzed the potential risks involved.
Such a shift is known as a corporate tax inversion. It's being considered by at least a dozen U.S. companies, because reincorporating in lower-tax locations overseas is one way to significantly cut the annual cost from the 35% top business tax rate in the U.S.
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But Wasson told analysts Walgreens' assessment found the potential risks of a headquarters shift "included potentially putting the company in a significantly worse position than if we had not inverted at all, such as a protracted controversy with the IRS" and possible "litigation which could go on for three to 10 years."
Walgreens also weighed "harder to quantify" but equally significant risk of "consumer backlash and political ramifications, including the risk to our government book of business," said Wasson, referring to the millions of dollars in revenue the company gets from federal Medicare and Medicaid programs.
In a separate statement issued with Wednesday's announcement, Wasson said "the company also was mindful of the ongoing public reaction to a potential inversion and Walgreens' unique role as an iconic American consumer retail company."
"In the end, the parties could not arrive upon a structure that provided the level of confidence required by the (Walgreens) board to ensure that the transaction could withstand almost-certain intense, protracted IRS scrutiny," Wasson told analysts.
Walgreens' decision bucks a recent U.S. corporate trend. In the past decade there have been 47 U.S. companies that have undergone inversions, according to the Congressional Research Service. New inversions, such as the pending $55 billion acquisition of Ireland-based drugmaker Shire by U.S.-based AbbVie, have come under increasing criticism.
President Obama and some Democratic members of Congress argue that use of the tactic by firms that continue to do much of their business in the U.S. hurts the nation by siphoning away federal tax revenue. Obama accused companies that pursue inversions as "gaming the system."
On Tuesday, the Treasury Department announced that it was considering potential unilateral steps to limit the practice if Congress doesn't take action soon. Such action could have a potential chilling effect that could prevent some deals from moving forward — or spur other companies to complete inversions before Washington takes any action.
Republican leaders counter that a more productive response would be an overhaul of the federal tax code that includes a reduction of the top tax rate on businesses.
Sen. Dick Durbin, D-Ill., a leading critic of Walgreens' consideration of a tax inversion, hailed the company's decision.
"Earlier this morning, I spoke with the CEO of Walgreens, and am thrilled to say that the corner of happy and healthy is still right here in Illinois," said Durbin, who had previously invoked that folksy Walgreens slogan to question a potential reincorporation in Europe.
But some analysts, though concerned about the inversion issue, appeared to focus more on other financial questions about the Walgreens-Alliance Boots deal.
Barclays analyst Meredith Adler questioned why Walgreens wasn't pursuing a larger stock buyback than the $3 billion plan through 2016 the company announced Wednesday.
The Walgreens-Alliance Boots announcement "raises more questions than it answers" about the merged companies' performance and leadership, said Michael Pryce-Jones, senior governance analyst for the CtW Investment Group, which works with union-sponsored pension funds.
"Walgreen has failed to deliver on its promised short-term goals and has not laid out a clear plan for long-term, sustainable growth," said Pryce-Jones. "We think the steep drop in stock price today reflects dramatically reduced earnings projections along with shareholder doubts about Walgreen Boots Alliance's strategy — especially as poor performance offsets synergies."
Contributing: Aamer Madhani