Pharmaceutical companies Pfizer and Allergan have announced a record-breaking $155bn (£100bn) deal that looks sure to prompt an international row over corporate tax avoidance.
Pfizer, Allergan Confirm $160 Billion Merger Deal
Pharmaceutical companies Pfizer and Allergan have announced a record-breaking $155bn (£100bn) deal that looks sure to prompt an international row over corporate tax avoidance.
The deal, which would create the world’s biggest drugmaker by sales, is the latest in a series of takeovers in which a US company effectively relocates its headquarters overseas to exploit another country’s lower corporate tax regime – a process known as tax inversion.
It was immediately condemned by Democrat presidential candidates Bernie Sanders and Hillary Clinton. Sanders called it “a disaster”.
Pfizer facts
Chief executive Ian Read
Revenues $49.6bn (2014)
Market value $190bn
HQ New York, US
US corporation tax 35%
Best-known treatment Viagra (erectile dysfunction)
Employees 78,000 (May 2014)
Other brands Lipitor (statin), ChapStick (lip balm), Advil (headaches), Centrum (multivitamins), ThermaCare (heatwraps), Xanax (anxiety)
Allergan facts
Chief executive Brenton Saunders
Revenues: $13bn (2014)
Market value: $123bn
Headquarters: Dublin, Ireland
Irish corporation tax 12.5%
Employees 30,000 (June 2015)
Best-known treatment Botox Cosmetic (anti-wrinkle treatment)
Other brands Namenda (Alzheimer’s), Juvederm (facial filler), Restasis (dry eyes)
Viagra-maker Pfizer, one of the top names in corporate America, would be based in Ireland, where Allergan is headquartered, should the deal be approved. Effectively, Pfizer is pursuing a reverse takeover of Allergan, which makes Botox, with the smaller company buying New York-based Pfizer.
After the sale, the combined company will be renamed Pfizer PLC and continue to trade on the New York Stock Exchange. Pfizer’s current tax rate is about 25% and would drop below 20% in Ireland, analysts estimate.
Inversions will cost the US taxpayer $19.5bn over the next 10 years, according to Congress’s joint committee on taxation. Pfizer is joining a growing number of big US companies now officially based overseas for tax purposes including Burger King (Canada) and Chiquita Brands (Ireland), which have used reverse takeovers to cut their tax bills.
The long-rumoured deal is likely to come under intense political pressure. The US president, Barack Obama, has called inversions “unpatriotic,” while Clinton and Sanders have both previously criticised the proposed Pfizer deal, as well as high drug prices.
“This merger would be a disaster for Americans who already pay the highest prices in the world for prescription drugs,” Sanders posted on Twitter after the news broke.
Clinton opposes tax inversions and would call on regulators to crack down.
“We cannot delay in cracking down on inversions that erode our tax base,” she said in a statement on Monday.
Donald Trump, the frontrunner in the Republican field, and rival Marco Rubio have blamed the US tax code for inversions and pledged to cut US corporate tax rates to stop them.
Ian Read, Pfizer’s Scottish chief executive, told the Wall Street Journal last month that the US’s high tax rates meant Pfizer was competing “with one hand tied behind our back”. He said he had tried and failed to lobby for tax reform in Washington.
Anders Dahlbeck, tax justice policy adviser of non-governmental organisation ActionAid, said: “This is just the latest example of a multinational company exploiting the global race to the bottom on corporate tax rates to avoid paying their fair share.
“This is part of a global problem with huge impacts on the lives of people living in poverty. Poor countries are blighted by tax avoidance, with the International Monetary Fund estimating that they lose $200bn per year to tax avoidance.
“If the scourge of global poverty is to be tackled, governments must listen to the public and take bold action to tackle tax avoidance and ensure that multinationals pay their fair share of tax wherever they operate.”
The announcement comes as the US Treasury tries to block such deals. Earlier this month, it announced new rules designed to make it harder for a US company to buy a foreign company and relocate the combined entity’s address. The department has yet to comment on how the proposed rules would affect the Pfizer-Allergan deal.
Jack Lew, the US Treasury secretary, recently told CNBC: “US companies are currently taking advantage of an environment that allows them to move their tax residence overseas to avoid paying taxes in the US, without making significant changes in the nature of their overall operations.
“While we intend to take additional action in the coming months, there is only so much the Treasury department can do to prevent these tax-avoidance transactions,” said Lew. “Only legislation can decisively stop inversions.”
But corporate experts are doubtful that significant change is coming. “This is an issue people shout about and then forget about. We see it each time one of these inversions is announced,” said Peter Henning, professor of law at Wayne State University. “This could be a campaign issue, but really what are they going to do? Get legislation through Congress? They can’t even pass a budget.”
The alternative, he said, was to push for tax reforms to ensure corporations stay in the US. “But tax breaks for corporations is not a platform I’d run on,” he said.
Last year, the UK’s AstraZeneca rejected a $119bn merger proposal from Pfizer. The bid attracted criticism from politicians on both sides of the Atlantic as well as AstraZeneca’s board and unions, who were concerned about job cuts.
Under the terms of the Allergan deal, the companies will exchange 11.3 Pfizer shares for every Allergan share. The deal also contains a cash component of between $6bn and $12bn.
“The proposed combination of Pfizer and Allergan will create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and therapies to more people around the world,” said Read.
“The combination of Allergan and Pfizer is a highly strategic, value-enhancing transaction that brings together two biopharma powerhouses to change lives for the better,” said Brent Saunders, Allergan’s chief executive.
The companies said the deal represents a roughly 30% premium to Allergan’s closing price on 28 October, the day the Wall Street Journal reported the companies were in talks.
Pfizer, Allergan Agree on Historic Merger Deal
The agreement would also be the biggest deal in what has been a banner year for mergers, driven in part by consolidation in the health care and pharmaceutical sectors. Merger and acquisition activity worldwide surpassed $4 trillion as of Thursday, for only the second time since Thomson Reuters began keeping records in 1980.
The deal is the latest - and the largest - to be aimed at helping an American company lower its taxes by reincorporating overseas, a practice known as a corporate inversion.
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President Obama has called inversions "unpatriotic." His administration has tried to crack down on the strategy this year, with the Treasury Department and the Internal Revenue Service announcing additional rules last week meant to further restrict the practice. The US government has already lost billions of dollars in tax revenue from inversions, particularly in recent years.
Rules introduced last year have deterred some companies from pursuing inversions, including the drug maker AbbVie calling off a planned $54-billion takeover of Shire, an Irish counterpart. The transaction would be structured as a so-called reverse merger, in which Allergan, the smaller of the two companies, would technically be the buyer.
Allergan has its headquarters in Dublin - even though the bulk of its operations are based in Parsippany, New Jersey - allowing the planned transaction to avoid the Treasury rules. But Pfizer is expected to lead the combined company, which would have more than $63 billion in combined sales and a product portfolio that includes Viagra, Celebrex, Botox and the cosmetic treatment Juvederm. It would have about 110,000 employees worldwide.
Under the terms of the all-share deal, Pfizer would essentially pay $363.63 for each Allergan share, representing a more than 30 per cent premium to Allergan's share price in late October before news emerged that they were in talks.
"The proposed combination of Pfizer and Allergan will create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and therapies to more people around the world," Ian Read, the Pfizer chief executive, said in a news release on Monday.
Read would be chief executive of the combined firm, while Brent Saunders, the Allergan chief executive, would serve as president and chief operating officer. Saunders would also have a seat on the combined company's board of directors.