The breakup fee is relatively small, especially given Pfizer’s market value of some $US200 billion.
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Pfizer and Allergan began touting their prospects as solo companies. He kept his “Buy” recommendation on Pfizer, adding, “We need a clearer vision of what “Plan B” might be”. If completed, it would have been the second-largest merger in history. “Allergan and Pfizer thought it was a remote possibility, and are ready to spring into action on our independent strategies”.
Anglo-Swiss drugs giant AstraZeneca fought off a £69 billion takeover bid from Pfizer in 2014, saying its bid undervalued the business. Pfizer had planned to move its headquarters to Ireland after buying Dublin-based Allergan, though it would keep its core management operations in America. Such a boost would have accelerated Pfizer’s growth, and might have paved the way for Pfizer to set loose its slower-growing but cash-generating “established products” business selling older drugs.
This is not the first time a tightening of the USA inversion rules have caused a merger to unravel.
Tax inversion is the process wherein a local company which wants to avoid high tax rates in its country of origin would be able to cut its taxes if it transfers its official address to another country which imposes lower tax rates. The subsequent demise of the deal allows Obama to claim a big win during his past year in office. When the deal was announced in November, presidential candidates Sen.
The tighter rules now in place crack down in particular on so called serial inverters, like Allergan, that are the result of more than one previous inversion in recent years.
That complicated the finely tuned math that was crucial for inversions like Pfizer’s to work. Investors in the inverting company should own between 50% and 60% of the combined entity for the deal to yield top tax benefits. Yet it was also a tie-up created to reap tax savings.
The latest rule changes go deeper and also highlight a commitment to do more if needed.
Although the Pfizer-Allergan combination offered some interesting strategic benefits, the cancellation of the merger indicates that tax synergies were the overwhelming factor supporting the transaction. But big drug deals tend to promise much on paper and deliver little in reality. Allergan has 395 million shares outstanding.
“Stripping those out leaves about 130 million shares, worth only about $30 billion”.
On Wednesday the Irish Ministry for Finance said “In relation to any transactions that may not involve real substance in terms of jobs and investment in the Irish economy, Ireland does not encourage such transactions”.
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On Monday, the Treasury announced two rules meant to limit the relocation of U.S. companies overseas for tax purposes, a process known as a tax “inversion”. Ireland-based Tyco International PLC, the target of Johnson Controls Inc.’s pending inversion, has made few acquisitions in the past three years. “We have a tax system that’s forcing capital out of the country”, he says.
