When US-listed Vertiv announced the acquisition of Co Donegal-based E&I Engineering in September 2021, The Currency suspected that the American multinational’s Irish investment was driven by a combined interest in both the successful specialist electrical contracting business, developed in the border region by its founder Philip O’Doherty, and in Ireland’s generous tax regime for holders of intellectual property (IP).

Both firms had focused on the supply of high-tech electrical installations to demanding clients such as data centres. Eighteen months on, new company information reveals the extent of the so-called green jersey structure assembled by Vertiv around the E&I acquisition.

First, Vertiv disclosed last year how much IP was contained in the acquisition of E&I. The total value of the transaction has since been confirmed to be $1.8 billion. (Additional payments conditional on the Irish company’s performance after the deal apparently did not take place: “The Company was obligated to pay up to $200 [million] of additional cash consideration if E&I achieved certain EBITDA targets for the year ended December 31, 2022. As of December 31, 2022, the value of the contingent earnout was zero based on E&I’s EBITDA results for the year ended December 31, 2022,” Vertiv reported last month.)

Around $1 billion, or more than half of the price paid for E&I, was in fact for various forms of IP, as detailed by Vertiv:

Vertiv’s allocation of portions of the purchase price to these items amounted to a whole new valuation of E&I’s intellectual property. (Another $748.2 million, which was not linked to individual assets, was categorised as non-amortisable goodwill.)

Vertiv explained how it came to the $1 billion figure for amortisable assets:

“The Company used the multi-period excess earnings method to value the customer relationship intangible assets and the relief from royalty method to value the developed technology intangible assets. The significant assumptions used to estimate the fair value of customer relationships included forecasted earnings before interest, taxes, and amortization, customer attrition rates and a discount rate.

“The significant assumptions used to estimate the fair value of developed technology included the forecasted revenues, royalty rates and a discount rate. These significant assumptions are forward-looking and could be affected by future economic and market conditions. The estimated weighted-average useful lives was 14.2 years for finite lived intangible assets.”

By contrast, none of the Irish companies acquired by the US group in 2021 had any intangible assets on their balance sheet. A subsidiary of E&I called Electrical Intellectual Property Ltd had collected several million euro each year between 2007 and 2010 in royalties from its trading sister companies, after which its activity virtually stopped. (There are no accounts publicly available for E&I’s Gulf subsidiary, which may have taken on an IP holding role after being established in the United Arab Emirates in 2008.)

E&I Engineering Ltd, the central trading company in the acquired Irish group with more than half of its revenue, did spend £1 million on research and development between 2020 and 2021, so it was creating IP – just nowhere near the valuation reported upon acquisition by Vertiv, and not in an accounting format that crystallised into amortisable Irish-based intangible assets.

Now that Vertiv’s forward-looking valuation method has valued them at $1 billion and put a 14.2-year duration on their useful life, this means the corresponding annual amortisation charge of over $70 million can come in deduction of E&I’s future taxable profits. Under Irish law, Vertiv can declare this amount as a tax-deductible cost up to 80 per cent of trading profit each year, and carry forward any unused deductions in a given year for use in the future.

The effect on Vertiv’s amortisation account has been spectacular. While this tax-deductible cost was hovering around $150 million for each of the three years preceding the acquisition of E&I, it jumped to $236.4 million last year. It is forecast to remain elevated until the end of 2026.

Vertiv categorises amortisation among “other operating expenses”, which increased by $60.6 million last year. The new intellectual property in its Irish acquisition almost entirely accounted for this sum: “The increase was primarily due to an increase in amortization of intangibles of $71.5 million associated with the acquisition of E&I on November 1, 2021, offset by a decrease in asset impairment of $8.7 million, and a change in foreign currency (gain) loss of $0.5 million,” a note to its other operating expenses account reveals.

A $200m trademark and intercompany debt

Vertiv’s new-found interest in the green jersey structure does not stop at its acquisition of E&I. The US group had a long-established presence in Ireland, inherited from Avocent’s engineering plant in Shannon and Emerson’s office distributing products in this country before the two multinationals merged in 2009.

The resulting Vertiv group, however, had since focused on the UK and Italy to develop its European business. Its surviving Irish subsidiary, Vertiv Ireland, declined to a revenue low of €20 million in 2020.

New company information shows that 2021 saw it spring back to life. The new directors appointed to take over E&I also assumed control of Vertiv Ireland and more than doubled its revenue to €52.1 million. 

Meanwhile, the Dublin-based company jumped on the intellectual property bandwagon: “In 2021, the company purchased a trademark amounting to €201,125,176 settled through cash, shares issuance and through promissory note,” it reported last week. Amortisation had not started in 2021, suggesting this green jersey structure was put in place at the very end of the year and really kicked into action in 2022.

The share issuance mentioned above was indeed declared on December 31, 2021 in exchange for the “contribution of an IP License” by a Vertiv group company in the US, accounting for €4.8 million of the overall transaction. Another €4.4 million slice of the trademark purchase was made through a cash capital contribution.

The bulk of the deal, however, was a €192 million intercompany loan. Any interest on this loan will now come in deduction of Vertiv Ireland’s taxable profits, along with the €16.8 million annual amortisation charge over the 12-year useful life of the trademark.

Along with the intangible assets booked through the acquisition of E&I, that’s a total of over €80 million in annual tax-deductible amortisations Vertiv was ready to use from the end of 2021 for the next 12 to 14 years – all thanks to its resolute return to Ireland.

All group subsidiaries in this country are now under the ownership of Vertiv Holdings Ireland DAC, a new holding company that has not yet filed accounts but has the legal capacity to own its own intellectual property as well.

Vertiv has not detailed the tax impact of its expanding holding of Irish-based intangible assets. It has, however, reported consolidated group accounts where its non-US profits grew from $238.9 million in 2021 to $250 million last year. Meanwhile, its current tax liability outside the US dropped from $104.4 million to $94.4 million over the same period. By contrast, its business in the US has been loss-making for years and does not generate any significant tax liabilities.