The pressure from investors remains intense, however, and shares of Walgreen tumbled sharply Wednesday morning, after the Deerfield, Illinois, company announced its plans and lowered its 2016 earnings goal for the combined company.
There have been 47 U.S. companies that have put together inversions through tie-ups with foreign businesses over the past decade, according to the Congressional Research Service.
Several others are planning or considering the move. Those including the drugmaker AbbVie, which last month announced a roughly $55 billion combination with drugmaker Shire Plc, which is incorporated in the United Kingdom.
Walgreen, however, said it was not confident such a deal could withstand IRS scrutiny.
A spokesman also said its original agreement with Alliance Boots, which runs the United Kingdom's largest drugstore chain, also was not structured as an inversion, and that would have forced the company to essentially create a new deal.
Walgreen CEO Greg Wasson said the board and outside advisers weighed several benefits and risks, including the hard-to-quantify but significant potential for consumer backlash and political headaches.
Companies are facing a growing pushback from Democrats in Congress and President Barack Obama due to lost U.S. revenue from corporate taxes from inversions. On Tuesday, the Treasury Department said that it was considering actions that could limit the ability of companies to use the tactic.
Illinois Sen. Dick Durbin had sent a letter to Wasson urging him to reconsider an inversion and warning that the company may find its customers are "deeply patriotic and will not support Walgreen's decision to turn its back on the United States."
In an inversion, a U.S. company reorganizes in a country with a lower tax rate by acquiring or merging with a company overseas. Inversions allow companies to transfer money earned overseas to the parent company without paying additional U.S. taxes. That money can be used to reinvest in the business or to fund dividends and buybacks, among other things.
Inversions also can reduce a corporation's corporate tax liability in other ways, and they provide some relief from the U.S. corporate tax rate of 35 percent, which is the highest in the industrialized world.
Walgreen Co. had drawn criticism for considering an inversion, in part because it receives part of its revenue through government-funded programs that help cover the poor and elderly people. The company addressed that issue Wednesday.
"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 with a major portion of its revenues derived from government-funded reimbursement programs," Walgreen Co. said in a statement.
Morningstar analyst Vishnu Lekraj has said Wall Street had largely expected Walgreen to pull off an inversion, even though he thought there was a strong chance it wouldn't happen, in part due to public backlash.
Instead of an inversion, Walgreen and Alliance Boots will form a new holding company named Walgreens Boots Alliance Inc. that will be headquartered in the Chicago area. Wasson will serve as CEO.