US tax crackdown puts paid to Pfizer-Allergan merger

A crackdown by the US Treasury that reduces the attractiveness of tax inversion deals appears to have scuppered the proposed US$160bn merger deal between US pharmaceutical group Pfizer and Ireland’s Allergan.

The Obama administration has toughened its stance after earlier attempts to discourage tax inversions – under which US companies acquire overseas companies in order to move to low-tax jurisdictions – achieved little success.

Ireland, where Allergan is based, already has a highly competitive corporate tax rate of only 12.5% and last October announced plans to halve it to 6.25% for companies that could demonstrate they were genuine innovators and employed highly skilled people within the country. By contrast, the US corporate tax rate is around 39% when average state tax rates are factored in.

News that the companies had decided not to proceed with the deal came a day after the US Treasury unveiled new rules to curb inversions. Although the new rules did not name Pfizer and Allergan specifically, among the provisions was one targeting a specific feature of their proposed merger; Allergan’s previous history as a major acquirer of other companies.

President Obama had described global tax avoidance a “huge problem” and urged Congress to take action to prevent US companies from pursuing tax-avoiding corporate inversions that allowed them to redomicile overseas to lower their tax bill. “The problem is that a lot of this stuff is legal, not illegal,” added Obama.

“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.”

Price of abandonment

Abandoning the union with Allergan is a setback for Ian Read, Pfizer’s chairman and chief executive officer (CEO), who had spent three years searching for a partner who would enable the company to escape the reach of US tax authorities. Pfizer attempted to launch a takeover of the UK’s AstraZeneca and also considered deals with Canada’s Valeant and the UK’s GlaxoSmithKline.

Pfizer stood to escape US taxes on more than US$128bn of profits stored abroad and it will have to pay a US$400m deal to Allergan to terminate the deal. The disappointment also extends to investment banks, which anticipated making US$350m in fees had the merger gone through – a new record for a merger/acquisition (M&A) deal.

In addition to the now abandoned Pfizer-Allergan union, other pending inversion deals involving US companies that have yet to close include the proposed US$16.5bn merger of Johnson Controls with Ireland’s Tyco International, Waste Connections Inc’s US$2.67bn deal with Canada’s Progressive Waste Solutions and IHS Inc’s US$13bn acquisition of the UK’s Markit.

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