GIANT DRUG DEAL AT RISK FROM OBAMA’S ANTI-INVERSION RULES
Less than 24 hours after the Obama administration escalated its battle against corporate tax inversions, the outcome of at least one major pending U.S. merger appeared clouded by doubt Tuesday.
The latest in a series of escalating Department of the Treasury regulations took aim at maneuvers in which U.S. firms merge with companies in lower-tax nations and then shift headquarters to the overseas locations. The moves often reduce the firms’ future U.S. tax bills, even as the companies maintain many of their domestic operations.
U.S. drug giant Pfizer and Ireland rival Allergan had structured the $160 billion merger they announced in November with terms designed to keep the potentially record-breaking transaction from violating the earlier rules limiting tax inversions. By Tuesday, the proposed merger partners said they were reviewing the newly announced rules.
“Prior to completing the review, we won’t speculate on any potential impact,” Pfizer and Allergan said in a joint statement.
However, Jeffrey Loo, a financial analyst at S&P Global Market Intelligence, wrote in a Tuesday research note that the new federal rules would calculate Allergan’s stake in the Pfizer deal by excluding the stock of previous U.S. firms Allergan acquired during the past three years.
The deals include the $66 billion merger with Actavis, the $25 billion acquisition of Forest Labs and the $5 billion acquisition of Warner Chilcott.
As a result, federal regulators could conclude that Pfizer’s ownership stake in the pending deal is significantly larger than initially thought, wrote Loo. If that happens, he added, the combined Pfizer-Allergan entity could “continue to be treated as a U.S. corporation for tax purposes” regardless of its expected new corporate address in Dublin.
Loo noted that the new rules also focus on corporate earnings stripping through debt issuance, which could make a tax inversion less financially attractive.
Investors appeared to signal active concerns about the deal. Allergan shares closed down 14.77% at $236.55 in Tuesday trading. Pfizer shares closed up 2.08% at $31.36.
John Colley, a Warwick Business School professor who researches large mergers, echoed that the anti-inversion rules are “casting doubt on the proposed merger, which appeared to be based more on the $21 billion tax benefits of a Dublin head office than any other mutual benefits.”
President Obama on Tuesday called corporate tax inversions “one of the most insidious tax loopholes out there.” He drew a comparison to recent Panama Papers revelations that provided new evidence of global tax evasion.
In 2014, he said that firms utilizing the tax-saving tactic were unfairly “gaming the system.”