DRUG MANUFACTURER Pfizer’s $160bn (£113bn) deal to take over Allergan has been axed following continued pressure from the Obama administration and its efforts to end so-called tax inversion deals.
The US Treasury announced on Monday that it would enforce a three year limit on foreign companies acquiring US assets, which would include Irish firm Allergan’s recent acquisitions of Actavis and Forest Laboratories, throwing the Pfizer merger into serious doubt.
Following the Treasury’s announcement, shares in Allergan fell 15% on 5 April.
Clamping down on tax inversions
Tax inversions allow large US companies to shift their headquarters overseas in order to take advantage of the favourable tax conditions in other jurisdictions. In this case Pfizer’s takeover of Dublin-based Allergan would see its corporation tax rate fall from 35% to 12%.
If the takeover was successful, it would have created the world’s largest drugs firm and would also have been the world’s largest tax inversion deal in history.
The White House has long sought to curtail so-called tax inversions by large US companies. In September last year, it was announced American firms were looking to shift their tax base overseas will have to shake up their investor base to ensure at least a fifth of the expanded business is held by new investors.
President Barack Obama also denounced tax inversions as unpatriotic and has urged congress to stop them. In February 2015 Obama proposed that a 19% tax on future foreign earnings and a one-time 14% levy on around $2tn in offshore profits could be awaiting US companies.
“They’re basically renouncing their citizenship and declaring that they’re based somewhere else, just to avoid paying their fair share,” Obama said at the time.
‘Never clear what benefits existed’
Professor John Colley of Warwick Business School said the latest move by the US Treasury could stop the deal from happening, as the Treasury’s move to limit tax changes would nullify any financial benefit Pfizer would gain from the takeover.
“Other than the tax benefits it was never clear what other benefits really existed in the deal,” said Colley.
“The stock market thinks that the US government is likely to be successful with this move. Indeed this move may well prevent recent tax inversion deals altogether.
“If so, US businesses will have to rely on more conventional benefits to justify their overseas merger plans. Pfizer may terminate the deal or alternatively renegotiate a lower price. Certainly their shareholders will not now be happy with the terms of the original deal.”
This is not the first time that a Pfizer takeover deal has fallen through. in 2014, Pfizer’s attempted takeover of Astra Zeneca failed, but was at least in part motivated by tax.