Corporate America was recently shocked by the news of the death of the biggest deal in the history of drug industry. Pfizer/Allergan merger hit the rocks. Report has it that Washington threw a monkey wrench in the works thereby frustrating the $160 billion deal and the largest tax inversion arrangement in American history.
Pfizer Inc. and Allergan Plc planned a merger that would have moved the biggest drug company in the U.S. to Ireland to lower its taxes. Industry watchers believe the Allergan deal would boost Pfizer’s strength in both high-cost, high-growth drugs as well as older, lower-cost drugs. But the new Treasury Department rules scuttled the contract which sme top Allergan executives described as ‘un-American’ and ‘capricious’.
Brent Saunders, Allergan Chief Executive revealed in an interview: “The rules are focused on the wrong thing: Our government should be focused on making America competitive on a global stage, not building a wall locking companies into an uncompetitive tax situation,”.
On the other hand, Ian Read, Pfizer Chief Executive explained the thwarted move as the company’s competitive disadvantage with foreign rivals that faced significantly lower tax bills.
The frustrated deal is Pfizer’s second failure at buying a foreign company. In 2014, Pfizer tried but failed to buy British drug maker AstraZeneca PLC. After searching for a new partner, it reached terms with Allergan.
Benefits of the Merger
By combining with Ireland-based Allergan, Pfizer could not only have cut its tax rate, but also get access to the billions of dollars in revenue it was keeping overseas to avoid paying U.S. taxes on top of the taxes it had already paid in foreign countries.
The combination also had non-tax benefits for Pfizer, including access to Allergan’s portfolio of strongly growing products like anti-wrinkle treatment Botox, dry-eye treatment Restasis, and new irritable-bowel drug Linzess. A combination also might have paved the way for Pfizer to shed its collection of cash-generating but older slower-growth drugs.
What’s more, the failed deal would have enabled Pfizer’s plans to break itself up. Company executives considered splitting the company for years, but were discouraged by concerns that its businesses may not be large enough to stand alone.
Why Washington frustrated Pfizer
Pfizer sought to escape the America’s high corporate tax rate by moving its address to low-tax Ireland, where Allergan is domiciled, but the new Treasury wiped out the advantages that many tax inverters are seeking, accusing Pfizer of trying to escape US taxes on more than $128 bn of profits stored abroad.
A statement attributed to Josh Earnest, President Barack Obama’s spokesman, reads: “I think it is fair to say that the administration would be pleased if corporate inversions that are undertaken solely to prevent companies from paying their fair share in taxes don’t go through.”
The Pfizer -Allergan merger was structured so that Pfizer shareholders would hold about 56 per cent of combined comapny, below the 60 per cent threshold that would have restricted benefits of the inversion under the old rules.
The failed contract also marked an impediment for investment banks, which were ready to smile home with $ 350 m – the fattest amount in merger and acquisition history – in deal fees. Guggenheim Securities, Goldman Sachs, Centerview Partners and Moelis & Company are advising Ppfizer, while JPMorgan and Morgan Stanley serve as Allergan’s financial advisers.
Penalty for failed deal
Pfizer, which had agreed to pay a break fee of up to $400 million, will pay $150 million to cover Allergan’s deal-related expenses.
According to Pfizer’s 2015 annual report, the company still has $80 billion in profits trapped overseas that it can’t bring back the U.S. without paying additional taxes.
Previous frustrated deals
The US Department of Justice sued to block Halliburton’s proposed $25bn takeover of rival oil services group Baker Hughes.
Halliburton is contesting the suit, but the implosion of the Pfizer-Allergan merger brought the value of deals withdrawn so far this year to $376bn — the highest since 2007 by deal value, when $405.9bn worth of transactions were thwarted, according to reports.