Did the US Kill the $160 Billion Merger Between Pfizer and Allergan?

- April 6th, 2016

New rules from the US Treasury stop the $160 billion Pfizer-Allergan merger in its tracks

New inversion riles in the United States have succeeded in ending a $160 billion merger between pharmaceutical heavyweight Pfizer (NYSE:PFE) and Ireland-based Allergan (NYSE:AGN). The companies announced the dissolution of the deal on Wednesday, with Pfizer noting that the decision was driven by new US Treasury rules aimed at such deals. The end of the deal can be seen as a win for US President Barack Obama, who has been pushing to deter companies from making deals in which they move overseas to cut taxes. 

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The US Treasury unveiled its new regulations on Monday, however the details are rather limited. CBC noted that in essence, “the rules seek to limit internal corporate borrowing that moves profit out of reach of Uncle Sam.”
Earlier in the week, Obama urged Congress to take action in stopping US companies from tax-avoiding corporate inversion, that aid in lowering company’s tax bills when they relocate overseas. As such, a significant part of the new rules are tailored to ensure that the deals being made are closer to mergers, rather than a large US company acquiring a smaller one in foreign locations with lower taxes. Indeed, had the deal gone through, relocating to Ireland, Pfizer would have seen its tax bill slashed.
“While the Treasury Department’s actions will make it more difficult… to exploit this particular corporate inversions loophole, only Congress can close it for good,” Obama said.

What does Allergan have to say?

While it hasn’t been explicitly stated that the change in regulations is targeting the Pfizer deal, Allergan CEO Brent Saunders told CNBC the company was blindsided by the Treasury’s announcement.
Saunders told CNBC on Wednesday that the companies “built this deal around the law, the regulations, all the notices that were put out by the Treasury and it was a highly legal construct,” noting that “We followed the rules that Congress had set for companies looking to move to foreign domicile.”
Still, in light of the change, Saunders noted “For the rules to be changed after the game has started to be played is a bit un-American, but that’s the situation we’re in.” Saunders said.
Saunders admitted to being disappointed that the deal would no longer be moving forward, however, he maintains that the company is “poised to deliver strong, sustainable growth built on a set of powerful attributes.”
Pfizer on the other hand also has new products underway, and plenty of capital that could be put to use in future acquisition endeavors.

What does the market say?

According to analyst Steve Brozak, president of WBB Securities LLC “The Obama administration isn’t just sending a message to Pfizer, it’s sending a message to all U.S. companies contemplating inversions, and that message is ‘Don’t.”
Meanwhile, investors had for the most part chosen to view the deal as dead in the water as of Tuesday, before the companies announced. On Tuesday, Allergan shares were down 15 percent, but recovered slightly on Wednesday. Meanwhile, Pfizer was up 2.8 percent on Tuesday and another 4 percent on Wednesday.

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