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Pfizer and Allergan Call Off Merger After Tax-Rule Changes Pfizer Faces Limited Options After Its Dead Deal With Allergan
(about 11 hours 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 needs a Plan C.
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. Two years ago, the pharmaceutical giant tried — and failed — to take over the British rival AstraZeneca in a bid to become the world’s largest drug company and lower its tax bill in the process. On Wednesday, Pfizer said another big overseas merger had failed, this time a $152 billion merger with Allergan, after the Obama administration introduced rules that would make the deal much less attractive.
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. Now, Pfizer finds itself at yet another crossroads. The company’s stock has been growing steadily, but investors are certain to start agitating again to complete a bold move to push growth higher.
“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.” The company has basically two choices: get bigger, or break apart.
Pfizer said that the companies determined that the latest rule changes qualified as an “adverse tax law change” under their merger agreement. If it goes hunting for a new acquisition, its options are far more limited now than they were just last week. On Tuesday, the Obama administration introduced an aggressive and expansive series of rule changes aimed at limiting so-called inversions, which allow an American company to shed its United States corporate citizenship to move income beyond the reach of American tax authorities.
News that the companies planned to scuttle the deal first emerged Tuesday night. A big part of Allergan’s appeal was that the company’s tax domicile is in Ireland. But with the changes to the rules, those tax benefits went away — as they most likely would in similar deal between Pfizer and a company in a low-tax country.
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. Still, shares of several foreign pharmaceutical companies were trading higher on Wednesday, including AstraZeneca, GlaxoSmithKline and Shire, perhaps on speculation that Pfizer would still pursue an overseas acquisition.
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 approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” Ian C. 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.”
“As always, we remain committed to enhancing shareholder value,” Mr. Read said. Pfizer’s brief news release said little about its future plans. But some analysts saw significance in a statement by Mr. Read that indicated the company planned to decide whether to break itself up by the end of this year. Some analysts lobbied for such a move because they argued that two smaller and more focused companies would be worth more than one bigger one.
The latest rule change seemed to specifically target the Pfizer-Allergan merger, eliminating many of the deal’s tax benefits. “The fact that the company is talking about the original split-up decision timeline of late 2016 almost seems to suggest they have given up on inversion,” said Tim Anderson, a senior analyst for Sanford C. Bernstein & Company, in a note to investors. Mr. Anderson said Pfizer could have seen the Allergan deal as an opportunity, but once it did not happen, “perhaps it is back to usual business once again.”
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.” Mr. Anderson, who had previously supported a breakup, noted that the company’s statement did not mean Pfizer had settled on splitting. But by raising the issue, he wrote, “this essentially puts the carrot back in front of the stock again.”
Such transactions have often taken the form of an inversion, in which an American company would acquire an overseas rival and reincorporate overseas. Pfizer’s plans to make itself smaller dates to 2011, when Mr. Read, who had recently taken over as chief executive, announced plans to become a more focused company following a series of multibillion-dollar acquisitions. Under Mr. Read’s direction, the company slashed its research and development budget and, in 2012, sold its infant nutrition business to Nestlé. In 2013, it spun off its animal health business into what is now Zoetis.
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. In 2014, the company divided its business into two segments — one devoted to new brand-name medicines and the other to older medications that had lost patent protection. That was seen as a preliminary step toward breaking the company in two.
Those plans receded, however, when Pfizer decided to follow in the footsteps of many of its competitors by performing an inversion, in which an American company acquires an overseas rival and reincorporates overseas.
In 2014, Pfizer tried to acquire AstraZeneca, but it ultimately abandoned the pursuit after AstraZeneca repeatedly snubbed Pfizer’s approaches. The proposed takeover also faced stiff political opposition over potential job losses in Britain.
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 last 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. 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.”
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. The latest rule change seemed to specifically target the Pfizer-Allergan merger, eliminating many of the deal’s tax benefits.
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. Now that such a deal is less attractive, Pfizer would be smart to return to its earlier plan, said Erik Gordon, a business professor at the University of Michigan who follows the pharmaceutical industry.
Allergan, a drug maker based in Dublin, was largely built through acquisitions of American companies. “What do you have now?” he said. “Now you have the same Pfizer that was going to split, that’s what.”
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. Regardless of what path it chooses, major players like Pfizer cannot afford to stand still, said Dimitri Drone, who leads the pharmaceutical merger and acquisition practice at PricewaterhouseCoopers.
By the time the Pfizer deal was announced, Allergan had grown to have a market cap of about $100 billion. “The larger a company gets, the harder it is to demonstrate growth — it’s just the law of numbers,” he said. “When you’re big, you need to do things that continue to demonstrate that you can hold your own.”
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 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.
“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.