Pharmaceutical giants Pfizer and Allergan are reportedly nearing a blockbuster deal that could be announced as soon as this week. But the economics of the deal, valued at up to $150 billion, could be less lucrative under new U.S. Treasury Department rules designed to diminish the financial benefits of cross-border transactions.
Pfizer has been searching since last year for a takeover that would allow it to shift its headquarters from New York to a tax-friendly jurisdiction. Its record-setting $101 billion bid to acquire London-based AstraZeneca ultimately failed, but set off a wave of copycat transactions across the pharmaceutical sector and other industries.
Allergan, formerly headquartered in California, is now a Dublin-based entity following its March acquisition by Actavis.
“An acquisition of Allergan by Pfizer makes sense,” said Maxim Jacobs, an analyst at Edison Investment Research. “Pfizer desperately needs a large acquisition and the resulting synergies to reinvigorate its tepid earnings growth rate. Also, Allergan would help Pfizer escape the uncompetitive U.S. corporate tax rate, which has led company after company to domicile away from its shores.”
The so-called tax-inversion strategies have been in the crosshairs of the Obama administration and some members of Congress.
Treasury Secretary Jacob Lew last week introduced new rules that would limit the financial benefits of such deals, although the agency doesn't have the power to prevent them. Nevertheless, the rules reduce the tax incentives for an inversion and make it more difficult for a U.S. company to qualify for one.
Rep. Mark Pocan (D-Wis.) this month introduced two bills that would put more teeth into preventing tax-inversion deals. One bill would prevent companies from deferring taxes on foreign profits, while the other targets “earnings stripping,” or the practice of moving profits to lower-tax jurisdictions.
