August 5 was a bad day for all those hoping the mergers and acquisitions boom had further to run. Investment bankers had been rubbing their hands over the year-to-date tally — $2.3 trillion of announced deals globally, according to Dealogic, with more deals in Europe and Asia than in the whole of last year. Then, in the space of a few hours, the bubble burst, as takeover proposals worth more than $100 billion collapsed.

But a bad day for financial advisers also held good news for investors.

Deals that hit the wall, and the headlines, included 21st Century Fox’s $71bn attempt to buy Time Warner and Sprint’s informal approach, reportedly worth $30 billion, for rival carrier T-Mobile US (which in turn rejected an unsolicited $15 billion bid for part of its business from French operator Iliad).

However, the most interesting deal that day was the one that went ahead. Walgreens, the US drugstore chain, pushed on with its $10 billion acquisition of the rest of Alliance Boots, the UK pharmacy in which it bought a majority stake last year. Crucially, though, the US company did not use the transaction to re-establish its headquarters in Europe and save billions of dollars in US tax, a strategy known as a tax inversion.

Investors had not demanded that it abandon this aspect of the deal. Instead, Walgreens recognised the growing political opposition to such tax-fuelled transactions.

The company said it was mindful of the public reaction to a potential inversion deal, given that it was an “iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programmes”. A sensible move, given the increased grumbling heard in Washington, from Barack Obama to Carl Levin, about US companies moving to Europe to take advantage of preferential tax regimes.

Bankers and other advisers are still clinging to the hope that companies less in the public spotlight than Walgreens will be tempted by inversion deals. But, even if Republicans and Democrats find it hard to agree on how to tighten the rules, there is a growing sense on Wall Street that legislation is on the cards.

A decline in companies’ willingness or ability to take advantage of generous tax benefits in Europe, or a shift in stance by the US government itself, is an important indicator of future M&A volumes.

Tax inversions have been a significant driver of the surge in M&A this year, with many of the largest transactions initiated by US companies seeking to deploy trapped offshore cash: notably Pfizer’s failed $116 billion bid for AstraZeneca, the $43 billion purchase of Dublin-based Covidien by Medtronic, the medical devices maker, and Abbvie’s attempt to buy the British drug company Shire for $53 billion.

Even so, a change in approach should cause investors to heave a sigh of relief. Tax benefits rarely, if ever, constitute a good reason for doing a deal. The appeal may be superficially obvious, allowing chief executives to put a convincing number on the savings a transaction would deliver. But such a rationale exposes shareholders to a number of risks.

First, tax policy can change. It is possible that the new European Commission heads taking office this autumn will try to act on the diverse tax regimes that operate across the Eurozone.

Second, revenue-strapped governments across the region could, in any case, change their minds about the benefits of offering tax sweeteners.

Third, companies can use a potential tax inversion to avoid making a proper case for the financial benefits of a deal, let alone the industrial logic. Pfizer’s move on AstraZeneca was a case in point. So is the oddly constructed merger between the Irish and US banana companies Fyffes and Chiquita. It may have been derailed by a Brazilian counterbid but it had originally involved Chiquita re-establishing in Ireland.

Finally, tax inversions were driving an M&A boom that was starting to look bubbly. Deal fever was being stoked not just by the need for US companies to put offshore cash piles to work, but also by the absurdly generous market borrowing terms available.

Dealogic points out that global acquisition-related corporate debt volumes have totalled $102 billion so far in 2014, up 43 per cent from the same period a year ago. US borrowers have recorded the largest year-on-year percentage increase, with volume up 66 per cent to $214.1 billion in 2014, the highest total since the same period in 2007.

Given that year was the peak of the last M&A bubble, a cooling of buyers’ ardour as demand for tax inversions wanes should be welcomed.

Financial Times