Though the news didn’t officially come from Pfizer (PFE) or Allergan PLC (AGN), reports that the two were in talks to become one weren’t denied by either, nor was that news particularly surprising — the pairing has been rumored for weeks.
What was surprising was how the Pfizer stock price lost more than 3% of its value today despite the fiscal benefits such a merger would create.
Almost as surprising was the fact that AGN shares also lost almost 3% of their value despite the allegedly generous offer Pfizer was making in what would be an all-stock deal.
The concern? That the U.S. Treasury Department will torpedo the pending deal before it’s consummated.
$150 Billion Worth of Pfizer Stock Offered
The unofficial news broke last night, when “a person familiar with the matter” confirmed to Reuters that Pfizer was prepared to offer the equivalent to between $370 and $380 per share of AGN in a bid for the Ireland-based maker of Botox. At the current Pfizer stock price of under $33, the offer would value Allergan at approximately $150 million.
If Pfizer’s aim to acquire an overseas rival rings a bit familiar, it may be because the U.S. drugmaker set its sights on UK-based AstraZeneca plc (AZN) last year.
While that deal ultimately fell through after the two parties couldn’t come to an agreement on price, Pfizer tipped its hand, so to speak, with its interest — it was looking to lower its tax bill, and could easily do so by officially moving its operation overseas, where corporate tax rates are considerably lower than they are in the United States.
And Pfizer wasn’t the only pharmaceutical name to vie for a deal that would allow for a so-called “tax inversion.” Though it ultimately fell through as well after the U.S. tweaked some tax laws to quell the practice, AbbVie (ABBV) was at one point in 2014 gunning for Dublin-based Shire PLC (SHPG) as a way to lower its tax bill.
Despite the tax law tweaks in the meantime, some tax inversion deals have still been made. And, Pfizer still clearly thinks there’s enough tax upside at stake to push forward with the merger with Allergan.
And, Pfizer may be right.
Although they’re just estimates, Credit Suisse analyst Vamil Divan’s number-crunching suggested Pfizer could lower its tax bill from 2014’s rate of just a little more than 25% to as low as 18% by 2019, when a union of the two companies could be fully completed and any tax benefits fully realized.
Moreover, Divan reckons that for every $1 billion in operational synergies the two companies find together could add between three and five cents to the bottom line per share of Pfizer stock.
Not So Fast
The timing of the Pfizer’s accelerated interest in Allergan may be strictly a coincidence, but the matter surfaced in earnest again just hours after Treasury Secretary Jacob Lew — who oversees several aspects of U.S. corporate tax rules including tax inversions — sent an official letter to the Senate Finance Committee explicitly criticizing such deals and encouraging the nation’s lawmakers to do more to quell them. That same letter further said he would issue “targeted guidance to deter and reduce further the economic benefits of corporate inversions” later this week.
It was this piece of the letter that spurred weakness rather than strength from Pfizer stock; the tax benefit of the union may be wiped away before a deal is ever struck.
That said, the Treasury isn’t necessarily in a position to do much more than it’s already done, and it clearly hasn’t halted tax inversions. To fully prevent the practice and prevent the loss of more tax revenue, Congress must move to update tax laws … a feat far easier said than done, inasmuch as doing so can crimp corporate support of politicians.
Bottom Line for PFE
It remains to be seen if the impending deal between Pfizer and Allergan will remain worth it. Clearly something is going to change, tax-law-wise, but if the only changes come from Treasury, those changes are apt to be relatively impotent.
Any tax-law changes from Congress would be more worrisome, though less likely. And, even if such changes are on the way, Washington rarely gets in a hurry to effect unpopular changes and often waters proposed changes down to appease as many people as possible.
In other words, odds are good the status quo will remain the basic status quo should Allergan and Pfizer make a deal both parties can live with.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
