Mega-Merger Not To Be

Pfizer and Allergan have mutually agreed to terminate their $160-billion merger after the US Department of the Treasury introduced new tax rules at the start of April, specifically aimed at preventing corporate tax inversion deals (1,2). The merger, first announced in November 2015, caused a huge stir within the pharma industry – and also within US government, since the transaction would mean that Pfizer could avoid US taxes by moving its corporate residence to Ireland, where Allergan is located.

Prior to April, US tax rules stipulated that, following a merger, if the shareholders of the former US company owned at least 80 percent of the combined firm, the government would subject the business to US taxes, even if the address was abroad. With the proposed merger, Pfizer’s US shareholders would have owned an estimated 56 percent of the combined company – well below the 80 percent threshold, and even below the 60 percent threshold where some restrictions still applied. Under the new rules, however, when the US Treasury calculates the size of the foreign firm (and thus the amount of tax the new company would have to pay) it does not take into account mergers that have taken place within the previous three years. Much of Allergan’s size is a result of their merger with other companies including Actavis, Forest Laboratories and Warner Chilcott – which when taken together equal around $90 billion dollars, which the US Treasury would not include when estimating the size of Allergan. This would mean that Pfizer’s shareholders would own more than 80 percent of the combined company and would therefore be subjected to US taxes. The US government has also issued regulations against ‘earnings stripping’, whereby recently merged companies – who still have their headquarters in the US – freely lend money to the subsidiary in the foreign country. This allows them to escape the US’s relatively high corporate taxes. The new rules mean the government has more authority to treat those transactions as equity movements – which are taxed. In a statement, Pfizer stated that the merger was terminated because of the “actions announced by the US Department of Treasury on April 4, 2016, which the companies concluded qualified as an ‘Adverse Tax Law Change’ under the merger agreement”. Allergan, however, will not be walking away empty handed – Pfizer has agreed to pay the company $150 million to reimburse expenses from the deal.

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