Treasury Department’s new inversion rules sour the deal
The move is a major victory for the Obama administration in its campaign against inversions, in which U.S.-based companies buy or merge with a smaller foreign firm and move their headquarters overseas in order to lower their tax bill. Just days before the decision to terminate the deal, the Treasury Department released new regulations to stem the tide of such inversions. Pfizer and Allergan subsequently spent two days scrambling to determine whether their merger still made financial sense.
According to analysts, the merger, the largest proposed inversion in history, was expected to lower the pharmaceutical giant’s tax rate significantly, from about 24% to 17%, and save the company about $35 billion in taxes. But the rules announced by the government would have made those savings more difficult to achieve.
The government’s action could prove to be a significant obstacle for other inversion deals that have come under heavy bipartisan criticism in the 2016 presidential campaign.
Pfizer will pay Allergan $150 million in a so-called breakup fee.
Allergan announced it will proceed with a planned sale of a substantial portion of its generic drug business to Israel-based Teva Pharmaceuticals. That transaction is expected to be completed in June.
“While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth,” Allergan chief executive officer Brent Saunders said in a statement.
Earlier, Treasury officials said they would now exclude the value of the foreign target’s last three years of acquisitions when determining the tax benefits of the deals.
That dealt a blow to the Pfizer-Allergan accord because Allergan has completed three major deals in the last three years, including its $66 billion merger with Actavis and its the $25 billion acquisition of Forest Laboratories.
“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” stated Ian Read, chairman and CEO of Pfizer. “We remain focused on continuing to enhance the value of our innovative and established businesses. We also maintain the financial strength and flexibility to pursue attractive business development and other shareholder-friendly capital allocation opportunities.
“We plan to make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016, consistent with our original time frame for the decision prior to the announcement of the potential Allergan transaction.”
Inversions have gained popularity in recent years, particularly in the pharmaceutical industry, as U.S. 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.