The regulation removed the tax benefits New York-based Pfizer had hoped to gain from the deal with Ireland’s Allergan.
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The tie-up would have been the largest inversion deal in corporate history, a tax-saving manoeuvre in which a United States company reorganises in another country with a lower corporate tax rate.
Ian Read, chairman and chief executive officer of Pfizer Inc., left, and Brent Saunders, president and chief executive officer of Allergan Plc, stand for a photograph in front of Pfizer headquarters in NY, U.S., on Monday, Nov. 23, 2015.
Pfizer agreed to pay Allergan $150 million to reimburse its expenses linked to the planned merger.
Aggressive new tax regulations issued by the Treasury Department persudaed Pfizer and Irish drugmaker Allergan to abort their proposed $160 billion “tax inversion” deal – giving a victory to the Obama administration.
Pfizer explicitly said that the new rules are the reason it and Allergan were strapping the merger plans.
“It really looked like they did a very fine job of constructing a rule here – a temporary rule – to stop this deal, and obviously it was successful”, he told CNBC’s “Squawk on the Street”.
On Tuesday, U.S. President Barack Obama weighed in on the inversion trend, saying “these companies get all the rewards of being an American company without fulfilling their responsibility to pay their fair share of taxes”.
Cowen and Co. analyst Steve Scala wrote to investors that Pfizer’s “innovative engine is starting to deliver, as evidenced by the success” of new breast cancer drug Ibrance, the promise of its immune system-boosting cancer drugs and growing sales of its pneumonia vaccine Prevnar-13 and blood thinner Eliquis.
The Treasury said the action releases updated framework for business tax reform as model for future action in its report, “Treasury Announces Additional Action to Curb Inversions, Address Earnings Stripping”. “So U.S. companies need inversion partners that are at least one-quarter their size, and ideally more like two-thirds”, the newspaper reported. But they had otherwise done little to stem a rising tide of USA companies seeking foreign acquisitions to reduce their tax rates.
Allergan and Pfizer aren’t the only ones losing out by the transaction falling through.
Meanwhile Republican presidential frontrunner Donald Trump says the only way to discourage deals like these is to lower the US corporate tax rate. The Treasury said it will focus on companies that have engaged in a number of acquisitions in a series, and it plans to limit foreign companies benefits in inversion.
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Last November, when the Pfizer-Allergan deal was struck, the market caps of Pfizer and Allergan were about $200 billion and $120 billion, respectively, and Pfizer stockholders would own 56% of the merged company, according to the Journal. Medical device maker Medtronic PLC, which completed a almost $43 billion combination with Ireland’s Covidien a year ago, said Wednesday that it has done a preliminary review of the Treasury rules and concluded that they do not have a material financial impact on the company.
