A new Treasury Department rule against corporate inversions threatens a merger between U.S.-based Pfizer and Ireland-based Allergan and has sent Allergan stock prices tumbling.
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Washington’s recent clampdown on the practice forced a response from USA research firm IHS and British financial data company Markit, which had announced merger plans in March, with the new company to be based in the U.K. They hastily released a statement asserting that the regulatory changes will not affect the deal.
“Pfizer today announced that the merger agreement between Pfizer and Allergan plc (NYSE: AGN) has been terminated by mutual agreement of the companies”. The merger would have allowed New York-based Pfizer to cut its tax bill by redomiciling to Ireland, where tax rates are lower. But the deal will proceed and still save hundreds of millions of dollars in taxes for investors because the Canadian tax rate is 28% versus 39.4% for the companies, he says.
The Treasury rules did not name Pfizer and Allergan but one of the provisions targeted a specific feature of their merger, specifically Allergan’s history as a major acquirer of other companies.
The two drugmakers are far from dire straits as they contemplate next moves after the inversion’s collapse.
“We remain focused on continuing to enhance the value of our innovative and established businesses”, he said, adding: “we remain committed to enhancing shareholder value”.
Companies shouldn’t have been surprised by the Treasury Department’s new regulations aimed at curbing corporate inversions because lawmakers have been working on legislation for years, Rep. Sander Levin (D-Mich.) told CNN Money.
Pfizer’s planned merger with Allergan was not technically an inversion, as Allergan would have been the buyer, but it would have essentially accomplished the same goal.
Johnson Controls spokesman Fraser Engerman said the company was reviewing the new Treasury regulations and wouldn’t speculate on what impact they might have on the Tyco deal. It had put off making that decision until 2019 after announcing its deal with Allergan last November.
He said the so-called Panama Papers demonstrate that leaders should do more to tighten tax laws and crack down on individuals and companies that use tax shelters.
Pfizer shares rose 1.5% in pre-market trading Wednesday to $31.84 after rising 2.1% on Tuesday in the wake of the Treasury news.
Pfizer, the maker of Viagra, pain treatment Lyrica and pneumonia vaccine Prevnar-13, said in a statement that its “late-stage pipeline has several attractive commercial opportunities” in multiple disease areas. For tax purposes, the US company becomes foreign-owned, even if all the executives and operations stay in the U.S.
Corporate tax inversions are being used by some U.S. multinationals to move their tax residences overseas – away from the high 35 percent United States headline federal corporate tax rate.
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At issue is “corporate inversion”, described by Investopedia.com as “one of the many strategies companies employ to reduce their tax burden”.
