US Kills $150B Pfizer-Allergan Tax Avoidance Merger

♠ Posted by Emmanuel in , at 4/06/2016 06:11:00 PM
Not gonna happen thanks to Uncle Sam's intervention.
A few weeks ago, I had written about the impending pharmaceutical mega-merger of Pfizer and Allergan. Although Pfizer is much larger than Allergan, the deal would have domiciled the combined corporation in Allergan's headquarters, Ireland, where tax rates have been historically low to attract foreign investment, among other things. A 12.5% tax rate looks none too shabby, right? They call this process "tax inversion." Meanwhile, there has been a massive outcry in the United States over this deal that is in large part meant to avoid taxation at higher US rates.

Two days ago, the US Treasury seemingly passed new regulations specifically designed to stop this merger:
Today, Treasury is taking action to:
·     Limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of U.S. companies. This will prevent a foreign company (including a recent inverter) that acquires multiple American companies in stock-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent U.S. acquisition. 
·     Address earnings stripping by:
o   Targeting transactions that generate large interest deductions by simply increasing related-party debt without financing new investment in the United States.
o   Allowing the IRS on audit to divide debt instruments into part debt and part equity, rather than the current system that generally treats them as wholly one or the other. 
o   Facilitating improved due diligence and compliance by requiring certain large corporations to do up-front due diligence and documentation with respect to the characterization of related-party financial instruments as debt.  If these requirements are not met, instruments will be treated as equity for tax purposes.
·     Formalize Treasury’s two previous actions in September 2014 and November 2015.
Treasury will continue to explore additional ways to address inversions. 

With such obstacles in the way--namely the combined might of the United States government--Pfizer and Allergan had no choice but to back out:
Allergan plc (NYSE:AGN) announced that its merger agreement with Pfizer (NYSE: PFE) has been terminated by mutual agreement, effective today. In connection with the termination of the merger agreement, Pfizer has agreed to pay Allergan $150 million for reimbursement of expenses associated with the transaction...
"While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth built on a set of powerful attributes. Leading therapeutic franchises with strong brands across seven therapeutic areas provide the foundation for continued strong growth in 2016 and beyond. Our pipeline is one of the strongest in the industry, loaded with 70 mid-to-late stage programs including 14 expected approvals and 16 regulatory submissions in 2016 alone," said Brent Saunders, CEO and President.  
Blame it on the US government coming up with special rules?
Allergan CEO Brent Saunders told CNBC on Wednesday the U.S. government had targeted his company's failed $160 billion deal with Pfizer. "It really looked like they did a very fine job of constructing a rule here — a temporary rule — to stop this deal, and obviously it was successful," he told CNBC's "Squawk on the Street."
Saunders was referring to new regulations issued Monday by the U.S. Treasury that will prevent so-called inversion deals — under which a U.S. company moves its base to a country with a more favorable taxation environment. The regulation removed the tax benefits New York-based Pfizer had hoped to gain from the deal with Ireland's Allergan. 
The reality is that, ever since the global financial crisis, revenue-starved Western governments like the US have not exactly been forgiving of foregone taxation in whatever form, be it offshore accounts of their citizens or corporations "moving" to low-tax locales. It was bound to get to this point, and a $150B mega-merger has, apparently been the last straw. 

Inverters beware!