Pfizer, Allergan Deal is the First Casualty of U.S. Tax Rule Changes

Pfizer Headquarters
TOKYO – MAY 11: Pfizer building on May 11, 2012 in Tokyo. Pfizer is one of largest pharmaceutical companies worldwide with tremendous revenue $67.4 bn USD for 2011. It exists since 1849.

If you were betting on the Pfizer (PFE), Allergan (AGN) deal going through, you woke up to some disappointing news this morning. Pfizer confirmed this morning that it would be terminating its $160 billion merger deal with Allergan. The merger kill is the first casualty of new U.S. tax rule changes designed to prevent tax inversion deals.

Pfizer did confirm that its decision was prompted by the U.S. Department of Treasury’s announcement of new tax laws. The companies determined that the new rules qualify as an “adverse tax law change” under its merger agreement.

The new tax rules, which were introduced earlier in the week by the Obama administration, make it more difficult for corporations in the U.S. to merge with companies overseas as a way to reduce their domestic tax burden.

Pfizer has agreed to pay Allergan the $150 million breakup fee for expense reimbursement.

Brent Saunders, Allergan’s CEO, told CNBC on Wednesday that the deal was targeted by the U.S. government.

“It really looked like they did a very fine job of constructing a rule here – a temporary rule – to stop this deal,” he said. Saunders added, “Obviously, it was successful.”

The new regulation eliminated the tax benefits U.S.-based Pfizer would have gained from merging with Ireland-based Allergan.

Saunders pointed to a provision in the regulation that puts a three-year limit on foreign companies stocking up on U.S. assets to circumvent ownership requirements for a future inversion deal. The CEO claims that this specific ban was implemented into the provision to block its deal with Pfizer.

Allergan was blindsided by the new regulation, and Saunders noted that the two companies built their deal around the regulations and the law. He stated that Allergan and Pfizer followed the rules set by Congress for companies moving to a foreign domicile.

Reportedly, Pfizer was posed to save $1 billion a year by moving its domicile.

Pfizer stock was up 2.5% on Wednesday after closing 2% higher the previous session. Allergan shares were also up over 2.5% after dropping 14.7% the previous session.

According to sources close to the matter, both companies believe the U.S. Treasury Department had overstepped its bounds, but the companies did not want to risk litigation against the U.S. government.

 

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