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updated: 8/7/2014 5:08 AM

Walgreen's decision to stay raises more questions

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  • Walgreens headquarters will remain in Deerfield.

    Walgreens headquarters will remain in Deerfield.


While Walgreen Co. Wednesday cleared up speculation on whether its headquarters would stay in Deerfield, a number of other questions remain.

Where will the new Walgreens Boots Alliance Inc. holding company -- to be formed after a takeover of Switzerland-based Alliance Boots -- be based? Will Chicago Mayor Rahm Emanuel push hard for a city versus a suburban location?

How much will Walgreen need to cut to overcome the estimated $4 billion tax savings it would have gotten by moving overseas?

And was the company's decision really based on public opinion and political pressure? Or did top executives believe a move was more trouble than it was worth?

While the nation's largest drugstore chain comes up with answers, its stock Wednesday was pummeled after the company announced it would stay in Deerfield, reorganize its leadership and search for another location to house its combined company rather than pursue a tax inversion, where it would have saved on U.S. taxes with an overseas-based headquarters.

The stock so far has lost about 17 percent, closing at $59.21, one of many sacrifices the company has made by turning away from the inversion.

"I have heard estimates of around $4 billion in potential tax savings over five years from pursuing inversion, but it is difficult to estimate considering the potential risks," said Tom Rowen of Bartlett, vice president and senior portfolio manager at Fifth Third Bank in Chicago.

"The $4 billion is an estimate of how much they might have saved in U.S. taxes by employing the inversion, not taking into account any offsetting impacts to their profitability due to lost customers, litigation or government action."

However, Walgreen's decision might have been the best one in the longer term and the firm is buying back outstanding shares and raising the dividends to stabilize the stock price, Rowen said.

Walgreen CEO Greg Wasson said in a statement Wednesday that an inversion would have led to more problems as it took over Alliance Boots, an international health and beauty group.

"We took into account all factors, including that we could not arrive at a structure that provided the company and our board with the requisite level of confidence that a transaction of this significance would need to withstand extensive IRS review and scrutiny," Wasson said.

In the meantime, Walgreen is gearing up to restructure the top executives at Alliance Boots, along with the rest of the company. It's also accelerating cost-cutting measures across the board.

The $1 billion, three-year plan includes corporate, field and store-level cost reductions, but company spokesman Michael Polzin declined to elaborate.

He also did not say where the new holding company would be based, where cutbacks or layoffs would happen, and what that last meeting was like when the final decision was made to forego the inversion. Spokesmen for the city of Chicago and the state of Illinois declined to comment on where the holding company might settle.

Rowen said the inversion posed a risk to Walgreen's reputation -- as a major U.S. consumer corporation and highly recognized brand -- that could have exceeded the possible tax savings in the long run.

Most of the company's revenue comes from domestic sales, with about 8,200 stores in 50 states. Substantial revenue comes from Medicare and Medicaid. Thus, criticism from President Barack Obama directed toward companies seeking inversion could have proved pivotal.

"In addition to the reputational risk and possible loss of customers, Walgreen's management was also concerned about a possible IRS challenge and future litigation," Rowen said.

Walgreen and its national competitors have saturated the retail drug market in the United States and have been looking to expand globally. Walgreen purchased a 45 percent ownership position in Alliance Boots in 2012, with the option to purchase the remaining 55 percent next year. Pursuing a complete acquisition is likely part of an ongoing global business plan, Rowen said.

The Walgreen inversion issue was more like a battle between sentimentality, nationalism and the bottom line, said David Aron of Naperville, chairman of Undergraduate Business Programs at the Brennan School of Business, Dominican University in River Forest.

"Walgreen's responsibility is to their stakeholders and especially their stockholders," Aron said, "So where do they end up? If they stay in Deerfield, they might accept it as a cost of doing business and keeping the locals happy, not to mention staying on the White House's good side, but can they afford to right now? We can already see how Wall Street has reacted."

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