A massive $150 billion merger between Pfizer and Allergan has been called off after the Obama administration issued new rules created to crack down on corporate tax avoidance.
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While the USA government’s new rules may have stunted the tax-inversion deal, cross-border merger activity is likely to continue unabated, some analysts and traders said.
However, Treasury’s new regulations limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of USA companies.
Allergan shares tanked after the announcement and on Wednesday, the companies said the actions announced by the US Department of Treasury qualified as an “adverse tax law change” under the merger agreement.
Shares of Pfizer edged up 36 cents, or 1.1 percent, to $31.72 in premarket trading about 90 minutes ahead of the market opening, while Allergen shares lost $3.80, or 1.6 percent, to $232.75.
“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies”, said Pfizer CEO Ian Read in a statement announcing the merger’s termination. “We remain focused on continuing to enhance the value of our innovative and established businesses”, he said.
Besides Pfizer-Allergan, other pending inversion deals that have not yet closed include the proposed $16.5-billion merger of Johnson Controls Inc with Ireland-based Tyco International Plc, Waste Connections Inc’s $2.67-billion deal with Canada’s Progressive Waste Solutions, and IHS Inc’s $13-billion acquisition of London-based Markit Ltd.
Such transactions have gained much popularity recently, particularly with pharmaceutical companies, as companies in the USA look to lower tax rates and use their income easily that is held in subsidiaries overseas. The expected value of the deal is reportedly $160 billion, but that amount, and the deal in general is no longer proceeding.
President Obama, speaking Tuesday, commended the Treasury Department for addressing the corporate inversion tax dodge this week.
Yet the planned move by Pfizer, the biggest drug company in the U.S.by sales, generated criticism and was even cited by Republican and Democratic presidential candidates.
Another new measure targets so-called “earnings stripping”, by classifying loans between related companies as equity during a tax audit. This is due to the difference in tax rates between the US and Ireland, where Allergan is based.
The decision to call off the deal came in part because Pfizer was concerned that any tweaks to salvage its deal with Allergan might have provoked new rules by the Treasury, a source familiar with the situation told Reuters on Tuesday.
It’s not the first time USA authorities have thwarted overseas takeover deals.
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In corporate inversions, USA multinationals change their tax locales in order to cut or avoid paying US taxes.
