The Dublin-based Botox-maker Allergan announced early Wednesday it would abandon its mega-merger with U.S. pharmaceutical giant Pfizer after new government regulations made the tax advantage of the cross-Atlantic deal more difficult to achieve.
The move is a huge victory for the Obama administration in its campaign against inversions, in which U.S.-based companies buy or merge with a smaller foreign firm and move their headquarters overseas in order to lower their tax bill. The Treasury Department released new regulations Monday to stem the tide of such inversions and Pfizer and Allergan spent two days scrambling to determine whether their merger still made financial sense.
The merger, the largest proposed inversion in history, was expected to lower the pharmaceutical giant's tax rate significantly, from about 24 percent to 17 percent, and save the company about $ 35 billion in taxes. But the rules announced late Monday would have made those savings more difficult to achieve.
In separate press releases, the companies called it a mutual decision, and Pfizer said it agreed to pay Allergan a $ 150 million breakup fee.
"The decision was driven by the actions announced by the U.S. Department of Treasury on April 4, 2016, which the companies concluded qualified as an 'Adverse Tax Law Change' under the merger agreement,’" Pfizer's statement said.
Allergan said it would hold a conference call at 10 a.m.
Tax experts say that the Treasury Department's new rules were more aggressive and broad than was expected. A legal challenge to the regulations may have been successful, they said, but would have taken years to make their way through the courts.
Pfizer's abandonment of the deal is likely to send a chill through the boardrooms of others corporations considering an inversion. But the Treasury Department's new rules don't address still significant problems with the corporate tax code. The U.S. levies the highest corporate tax rate, 35 percent, in the developed world and also collects U.S. taxes on profits that companies make overseas. Both have left U.S. corporations frustrated with a tax system that they argue is unfair.
Instead of bringing their foreign profits home, many U.S. firms increasingly leave them overseas to avoid the huge tax hit. The amount of unrepatriated foreign profits reached $ 2.4 trillion last year, according to Citizens for Tax Justice, allowing companies to avoid up to $ 695 billion in taxes.
Also, while derailing Pfizer's merger with Allergan, the Treasury Department's new rules don't appear to affect several other inversions that have been announced in recent months. Wisconsin manufacturer Johnson Controls announced said this year that it would merge with Tyco International and also move its headquarters to Ireland. That is expected to save the company $ 150 million a year in taxes and make it easier for it to access $ 8 billion in unrepatriated income. Last month, data provider IHS, which is based in Colorado,announced a $ 13 billion merger with Markit that would move its headquarters to London and save it about $ 260 million in taxes.Texas-based Waste Connections is planning to merge with the much smaller, Toronto-based Progressive Waste Solutions and move its headquarters to Canada.
Still consumer advocates have praised the rules as an aggressive step in addressing corporate inversions.
Both companies pivoted from the merger news to emphasize their strengths as individual companies going forward.
"Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies," Ian Read, Chairman and Chief Executive Officer of Pfizer said in a statement that emphasized recent product launches. "We plan to make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016, consistent with our original timeframe for the decision prior to the announcement of the potential Allergan 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," said Brent Saunders, chief executive of Allergan, in a statement.
Allergan's statement added that the company does not think the new Treasury rules will affect Allergan's effective tax rate.
President Obama said he is pleased with the Treasury Department’s plan to curb tax-avoiding corporate “inversions,” which he said “sticks the rest of us with the tab.” (Reuters)
Renae Merle covers white collar crime and Wall Street for The Washington Post.
Carolyn Johnson is a reporter covering the business of health. She previously wrote about science at The Boston Globe.
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