Coverage: Pfizer walks away from Allergan deal

Pfizer ended its $160 billion merger with Allergan after the U.S. Treasury Department announced its latest steps for cracking down on corporate inversions.

Jeffrey McCracken of Bloomberg had the day’s news:

Pfizer Inc. decided to terminate its $160 billion merger with Allergan Plc, a person familiar with the matter said, marking an end to the largest-ever health-care acquisition as officials in Washington crack down on corporate inversions.

Pfizer will need to pay a $400 million fee to Allergan for expenses relating to the deal, the person said, asking not to be identified as the information is private. Allergan, which is run from New Jersey but has a legal domicile in Dublin, last year agreed to merge with Pfizer in a deal that would have given the New York-based company a foreign address and a lower tax rate.

The decision represents a victory for President Barack Obama, whose administration on Monday proposed tougher-than-expected new rules aimed at making inversions like the Pfizer-Allergan deal harder to achieve. In an inversion, a U.S. company shifts its tax address overseas, often through a merger. In the Pfizer-Allergan deal, the new company would have been located in Ireland.

The Treasury Department said Monday that new rules would limit companies’ ability to participate in inversion transactions if they’ve already done them within the past 36 months. Allergan has been involved in several such acquisitions in that time frame. Representatives for Pfizer and Allergan declined to comment.

Prior to April 4, Allergan “was a great fit,” Bloomberg Intelligence analyst Asthika Goonewardene said via e-mail. But the new policies would have stretched the combined entity’s ability to garner the favorable Irish tax rate, he said.

Renae Merle and Carolyn Y. Johnson of The Washington Post explained the Treasury Department’s new rule:

Pfizer’s abandonment of the deal is likely to send a chill through the boardrooms of others corporations considering an inversion. But the Treasury Department’s new rules don’t address still significant problems with the corporate tax code. The U.S. levies the highest corporate tax rate, 35 percent, in the developed world and also collects U.S. taxes on profits that companies make overseas. Both have left U.S. corporations frustrated with a tax system that they argue is unfair.

Instead of bringing their foreign profits home, many U.S. firms increasingly leave them overseas to avoid the huge tax hit. The amount of unrepatriated foreign profits reached $2.4 trillion last year, according to Citizens for Tax Justice, allowing companies to avoid up to $695 billion in taxes.

Also, while derailing Pfizer’s merger with Allergan, the Treasury Department’s new rules don’t appear to affect several other inversions that have been announced in recent months. Wisconsin manufacturer Johnson Controls announced said this year that it would merge with Tyco International and also move its headquarters to Ireland. That is expected to save the company $150 million a year in taxes and make it easier for it to access $8 billion in unrepatriated income. Last month, data provider IHS, which is based in Colorado,announced a $13 billion merger with Markit that would move its headquarters to London and save it about $260 million in taxes.Texas-based Waste Connections is planning to merge with the much smaller, Toronto-based Progressive Waste Solutions and move its headquarters to Canada.

Still consumer advocates have praised the rules as an aggressive step in addressing corporate inversions.

Chad Bray of The New York Times detailed how this deal isn’t Pfizer’s first attempt to create a tax inversion for itself:

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.

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.

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.

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.

Allergan, a drug maker based in Dublin, was largely built through acquisitions of American companies.

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.

By the time the Pfizer deal was announced, Allergan had grown to have a market cap of about $100 billion.