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| Pfizer and Allergan Call Off Merger After Tax-Rule Changes | |
| (35 minutes later) | |
| Pfizer and Allergan said on Wednesday that they had terminated their $152 billion merger by mutual agreement just days after the Obama administration introduced new rules meant to limit the ability of American companies to shift their home overseas simply to lower their tax bills. | Pfizer and Allergan said on Wednesday that they had terminated their $152 billion merger by mutual agreement just days after the Obama administration introduced new rules meant to limit the ability of American companies to shift their home overseas simply to lower their tax bills. |
| The deal, announced in November, would have been the largest transaction of its kind, a so-called inversion that allows an American company to shed its United States corporate citizenship in order to move income beyond the reach of American tax authorities. Allergan has its tax domicile in Ireland. | The deal, announced in November, would have been the largest transaction of its kind, a so-called inversion that allows an American company to shed its United States corporate citizenship in order to move income beyond the reach of American tax authorities. Allergan has its tax domicile in Ireland. |
| The decision is a victory for the Obama administration, which had previously moved to discourage such transactions and introduced a more aggressive and expansive series of rule changes on Monday. The latest changes, announced by the Treasury Department in conjunction with the Internal Revenue Service, could have wide-ranging effects on foreign companies with large American operations, tax experts say. | The decision is a victory for the Obama administration, which had previously moved to discourage such transactions and introduced a more aggressive and expansive series of rule changes on Monday. The latest changes, announced by the Treasury Department in conjunction with the Internal Revenue Service, could have wide-ranging effects on foreign companies with large American operations, tax experts say. |
| “Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” Ian Read, the Pfizer chairman and chief executive, said in a news release. “We remain focused on continuing to enhance the value of our innovative and established businesses.” | “Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” Ian Read, the Pfizer chairman and chief executive, said in a news release. “We remain focused on continuing to enhance the value of our innovative and established businesses.” |
| Pfizer said that the companies determined that the latest rule changes qualified as an “adverse tax law change” under their merger agreement. | Pfizer said that the companies determined that the latest rule changes qualified as an “adverse tax law change” under their merger agreement. |
| News that the companies planned to scuttle the deal first emerged Tuesday night. | News that the companies planned to scuttle the deal first emerged Tuesday night. |
| In walking away, Pfizer said it would pay Allergan, the maker of Botox and other drugs, $150 million as reimbursement of expenses associated with the transaction. | In walking away, Pfizer said it would pay Allergan, the maker of Botox and other drugs, $150 million as reimbursement of expenses associated with the transaction. |
| Pfizer also said that it planned to make a decision by no later than the end of this year on whether to pursue a potential separation of its businesses. | Pfizer also said that it planned to make a decision by no later than the end of this year on whether to pursue a potential separation of its businesses. |
| “As always, we remain committed to enhancing shareholder value,” Mr. Read said. | “As always, we remain committed to enhancing shareholder value,” Mr. Read said. |
| The latest rule change seemed to specifically target the Pfizer-Allergan merger, eliminating many of the deal’s tax benefits. | The latest rule change seemed to specifically target the Pfizer-Allergan merger, eliminating many of the deal’s tax benefits. |
| President Obama said on Tuesday that the new rules would help prevent companies from taking advantage of “one of the most insidious tax loopholes out there, fleeing the country just to get out of paying their taxes.” | President Obama said on Tuesday that the new rules would help prevent companies from taking advantage of “one of the most insidious tax loopholes out there, fleeing the country just to get out of paying their taxes.” |
| Such transactions have often taken the form of an inversion, in which an American company would acquire an overseas rival and reincorporate overseas. | Such transactions have often taken the form of an inversion, in which an American company would acquire an overseas rival and reincorporate overseas. |
| Inversions have gained popularity in recent years, particularly in the pharmaceutical industry, as United States companies look to lower their corporate tax rates and more easily use income that has been held in foreign subsidiaries. About 40 companies have struck inversions over the past five years, according to data from Dealogic. | Inversions have gained popularity in recent years, particularly in the pharmaceutical industry, as United States companies look to lower their corporate tax rates and more easily use income that has been held in foreign subsidiaries. About 40 companies have struck inversions over the past five years, according to data from Dealogic. |
| A move by the Obama administration to begin to tighten rules on inversions in 2014 killed some deals, including AbbVie’s planned $54 billion takeover of its Irish counterpart Shire. But those rule changes ultimately failed to stem the tide of American companies seeking foreign partners to reduce their tax rates. | A move by the Obama administration to begin to tighten rules on inversions in 2014 killed some deals, including AbbVie’s planned $54 billion takeover of its Irish counterpart Shire. But those rule changes ultimately failed to stem the tide of American companies seeking foreign partners to reduce their tax rates. |
| 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. | 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. |
| It was the second attempt by Pfizer, the blue-chip drug maker that produced painkillers during the Civil War and penicillin during World War II, to shift its tax home overseas in recent years. | It was the second attempt by Pfizer, the blue-chip drug maker that produced painkillers during the Civil War and penicillin during World War II, to shift its tax home overseas in recent years. |
| Pfizer tried unsuccessfully to acquire AstraZeneca and create the world’s largest pharmaceutical company two years ago. Pfizer abandoned the pursuit as its British rival repeatedly snubbed Pfizer’s approaches and the proposed takeover faced stiff political opposition over potential job losses in Britain. | Pfizer tried unsuccessfully to acquire AstraZeneca and create the world’s largest pharmaceutical company two years ago. Pfizer abandoned the pursuit as its British rival repeatedly snubbed Pfizer’s approaches and the proposed takeover faced stiff political opposition over potential job losses in Britain. |
| Allergan, a drug maker based in Dublin, was largely built through acquisitions of American companies. | Allergan, a drug maker based in Dublin, was largely built through acquisitions of American companies. |
| The company, then known as Actavis and based in New Jersey, bought Warner Chilcott in October 2013 for $8.5 billion and moved its tax home to Ireland. In July 2014, Actavis acquired New York-based Forest Laboratories for $28 billion. The next year, Actavis took over the Botox maker Allergan for $70.5 billion. | The company, then known as Actavis and based in New Jersey, bought Warner Chilcott in October 2013 for $8.5 billion and moved its tax home to Ireland. In July 2014, Actavis acquired New York-based Forest Laboratories for $28 billion. The next year, Actavis took over the Botox maker Allergan for $70.5 billion. |
| By the time the Pfizer deal was announced, Allergan had grown to have a market cap of about $100 billion. | By the time the Pfizer deal was announced, Allergan had grown to have a market cap of about $100 billion. |
| The latest rule changes by the Treasury Department are intended to discourage such transactions by targeting “serial inverters,” foreign companies that bulked up by buying American ones for tax advantages. The new rules seek to restrict such transactions by disregarding the value of the American businesses acquired over the last three years. | The latest rule changes by the Treasury Department are intended to discourage such transactions by targeting “serial inverters,” foreign companies that bulked up by buying American ones for tax advantages. The new rules seek to restrict such transactions by disregarding the value of the American businesses acquired over the last three years. |
| The new rules would also attack another technique used by multinational companies to reduce their taxes, known as earnings stripping. The tactic involves an American subsidiary borrowing from its overseas parent company. It allows the United States business to deduct interest payments from its earnings. Since it is an intercompany loan, the cost is not reflected on financial statements. | The new rules would also attack another technique used by multinational companies to reduce their taxes, known as earnings stripping. The tactic involves an American subsidiary borrowing from its overseas parent company. It allows the United States business to deduct interest payments from its earnings. Since it is an intercompany loan, the cost is not reflected on financial statements. |
| The Treasury would treat such debt as stock, eliminating the interest payments altogether and allowing the American subsidiary to be taxed on the full basis of its earnings in the United States. | The Treasury would treat such debt as stock, eliminating the interest payments altogether and allowing the American subsidiary to be taxed on the full basis of its earnings in the United States. |
| Based on a preliminary review of the proposed regulations, Allergan said on Wednesday that it believed they would have no material impact on its stand-alone tax rate. | Based on a preliminary review of the proposed regulations, Allergan said on Wednesday that it believed they would have no material impact on its stand-alone tax rate. |
| “While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth built on a set of powerful attributes,” Brent Saunders, the Allergan chief executive and president, said in a news release. | “While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth built on a set of powerful attributes,” Brent Saunders, the Allergan chief executive and president, said in a news release. |