$160B deal to combine Pfizer and Allergan raises outcry.
A $160 billion deal announced Monday to merge Pfizer and Allergan and create the world’s biggest drug company renewed the outcry in Washington over “inversions,” in which U.S. corporations combine with companies overseas to lower their tax bill. U.S. pharmaceutical giant Pfizer (PFE) and Irish rival Allergan(AGN) Monday announced a record-breaking $160-billion merger, the largest in health-care industry history and the biggest yet involving a controversial tax-saving strategy.Pfizer Inc. on Monday said it would buy Botox maker Allergan PLC in a deal worth $160-billion (U.S.) to slash its U.S. tax bill, rekindling a fierce political debate over the financial manoeuvre.Pfizer Inc., PFE -2.64 % the drug giant, has announced plans to merge with Allergan PLC, a Dublin-based firm, in an “inversion” deal that is expected to cut Pfizer’s tax rate by about one-third.
The combination — the second-largest merger in history — could have ramifications around the globe, pushing up drug prices and spurring more such deals in the fast-consolidating health care sector and other fields. We cannot delay in cracking down on inversions that erode our tax base.” She vowed to release a proposal in the coming weeks to curb similar transactions. It is also increasing the election-year backlash from U.S. politicians who have been criticizing drugmakers recently over medicine prices that sometimes exceed $100,000 a year.
The news prompted Democratic U.S. presidential front-runner Hillary Clinton to promise to propose measures to prevent the increasingly popular and controversial practice aimed at helping U.S. companies lower their taxes by reincorporating overseas. The deal is taxable to shareholders because Pfizer investors are receiving a total of more than 50% of the stock of the foreign firm Allergan, according to Robert Willens, an independent tax adviser in New York. Her two main Democratic competitors, Senator Bernie Sanders and former Maryland governor Martin O’Malley, and lawmakers from their party also denounced the merger as an example of how the system favors corporations more than middle-income individuals. NEW YORK (AP) — An Associated Press analysis finds airplanes spent an average of 23 minutes, 32 seconds taxiing between gates and runways during the first nine months of this year. In what would be the biggest inversion ever, New York-based Pfizer could save hundreds of millions in U.S. taxes annually because it would move its tax headquarters to Ireland, where Allergan is based.
Shares of Allergan and Pfizer fell more than 2 per cent as investors learned the merger, which would create the world’s largest drug maker, would bring lower cost savings than they had hoped. Pfizer investors will get one share of the new company for each of their shares or a portion of payment in cash from a $6 billion to $12 billion payment that will be made as part of the merger. As a result, shareholders holding Pfizer shares in a taxable account, rather than a tax-sheltered retirement account such as an IRA, 401(k), or 403(b) plan, will owe tax on the capital gains in their shares.
The transaction is currently valued at $363.63 per Allergan share, for a total enterprise value of roughly $160 billion, including debt, based on the $32.18 per share closing price of Pfizer stock on Nov. 20, the companies said. Inversions have long been attacked by some politicians as a tax dodge, and Hillary Rodham Clinton and Bernie Sanders, the leading Democratic presidential contenders, criticized the deal. While it plays into the campaign themes of the Democratic candidates, some of the Republican contenders, including Trump, have backed tax law changes to lower U.S. corporate tax rates to get rid of the incentive for those moves.
The deal terms call for the companies to combine under Allergan, which will be renamed Pfizer and trade on the New York Stock Exchange under the PFE ticker symbol. Clinton said it will leave “U.S. taxpayers holding the bag,” while Sanders said it will be a “disaster” for Americans already paying high prescription drug costs. Treasury, concerned about losing billions in tax revenue, has been taking steps to limit the benefits of tax-inversion deals, but it admitted last week it would take legislation from Congress to stop such moves. WASHINGTON (AP) — Fewer Americans bought homes in October, a sign that rising home values may be pushing more would-be buyers to the real estate market’s sidelines. The Allergan acquisition will delay New York-based Pfizer’s decision on whether to sell off its lower-margin unit by two years, until late 2018, the company said.
Pfizer has said it expects between $6 billion and $12 billion from the merger will be paid out to shareholders, presumably to help cover their tax bills. The National Association of Realtors said Monday that sales of existing homes fell 3.4 percent last month to a seasonally adjusted annual rate of 5.36 million. The deal enhances offerings from both Pfizer’s faster-growing branded-products business, with additions such as Botox, and its older established products unit. Still, investors had been hoping Pfizer would sell off the lower-margin business in 2017, a move now put off by the time required to integrate Allergan. “The only thing I’d really say I’m disappointed about is Pfizer’s postponing their breakup,” Gabelli Funds portfolio manager Jeff Jonas said.
Despite attempts by Congress and the Treasury Department to thwart the practice, about 50 U.S. companies have inverted in the past decade, and more are considering it, according to the nonpartisan Congressional Research Service. He called the delay decision “pretty conservative and a little late.” Others were disappointed by other aspects of the deal, including the projected cost savings, and a lack of details on potentially increased share buybacks. Pfizer Chief Executive Officer Ian Read has already reached out to lawmakers in both houses of Congress, including Senate Majority Leader Mitch McConnell, and was planning to call the White House on Monday, according to a person with knowledge of the matter.
On a conference call with analysts, Pfizer said the merger would give it enhanced access to its tens of billions of dollars parked overseas and allow for more share buybacks, dividend payments and business development. Read has said his New York-based company is at a competitive disadvantage by having its tax domicile in the U.S., and his pitch is that that the deal will help the companies invest in more innovative drugs. White House press secretary Josh Earnest said he wouldn’t comment directly on the Pfizer deal or any other private transaction, but he offered up a repeat of administration criticism of corporate inversions. The agreement comes four days after the Obama administration stepped up its attack on corporate tax inversions — transactions in which a U.S. company reincorporates in a lower tax nation in a bid to cut its future tax bills while its leaving domestic operations in place.
Charles Schumer, D-N.Y., a member of the Senate Finance Committee, called Pfizer’s move “truly disturbing,” given how the company has benefited from federally funded research and infrastructure. He says that two-thirds of his $65,000 investment in Pfizer, which he made in 1997, consists of capital gains. “I think they don’t care about individual shareholders. “This is about creating value over the long term for our shareholders,” said Frank D’Amelio, Pfizer’s Chief Financial officer.
He cited President Barack Obama’s “longstanding concern and outright criticism of companies to pursue this strategy” which amounts to companies renouncing their citizenship “while continuing to benefit from all America has to offer.” Earnest used the opportunity to take a shot at congressional Republicans, who he said continue to protect corporations by failing to deal with tax inversions through legislation. Treasury Secretary Jacob Lew said the restrictions, the second targeting inversions since 2014, were aimed at preventing inversions from eroding the nation’s federal tax base. Read, who has long sought to slash Pfizer’s U.S. tax rate, said the deal would help put the company on “on a more competitive footing” with overseas-based rivals. The Republican chairmen of House and Senate committees that handle tax policy used the moment Monday to call for broader changes to the U.S. tax code. The unusual disclosure comes from Geneva-based Nestle SA itself, which in an act of self-policing planned to announce the conclusions of its yearlong internal investigation on Monday.
Pfizer officials predicted the Pfizer-Allergan combination would have an effective tax rate of 17% to 18% starting in the first year after the deal closes — well below the 25% rate the U.S. firm currently reports in financial filings. John Colley, a professor at Warwick Business School in Britain, predicted even bigger deals as “industry players become concerned about being left behind in the race for scale.” For consumers, however, such combinations could lead to higher drug prices, as well as higher taxes to cover the lost tax revenue, said Jerry Reisman, a New York merger expert. Pfizer Inc. and Allergan PLC’s record-setting merger may yield as much as $350-million (U.S.) in fees for the bankers who helped pull off the largest-ever pharmaceutical deal. Nestle, among the biggest food companies in the world, launched the investigation last year after reports from news outlets and non-governmental organizations tied brutal and largely unregulated working conditions to their foods. Pfizer will probably pay $120-million to $150-million in fees while Allergan’s advisers will split $160-million to $200-million, according to estimates from consultants Freeman & Co.
The steps were “limited in scope and should have a fairly modest impact,” Goldman Sachs Group Inc. analyst Alec Phillips said in a note to clients when the Treasury announced its measures. Ford Motor Co. will not be using air bag inflators made by Takata Corp. in future vehicles, another blow to the troubled Japanese parts supplier as the auto industry continues to shun its product. It costs upwards of $1.5 billion to get a new drug approved. “The impact for patients is great, both short term and long term,” said Read, who will be chairman and CEO of the combined company, to be called Pfizer Plc. The level of Pfizer ownership falls below the 60% legal threshold needed for the deal to be officially deemed a tax inversion under the federal tax code and considered subject to the Treasury rules, said independent tax expert Robert Willens.
Executives wouldn’t discuss any layoffs, but they are considered inevitable, given that the companies predict annual savings of about $2 billion within three years of closing the deal. The deal, valued at $160-billion, is the largest acquisition announced so far this year, making the payout the biggest this year, according to Freeman. The transaction was complex, structured so that Dublin-based Allergan is technically buying its much larger rival, in a move that would make it easier for Pfizer to relocate to a more attractive tax base in Ireland. The rule is that any taxpayer can give an unlimited number of recipients up to $14,000 each per year with no gift-tax due, and one partner of a married couple can give $28,000 if the other doesn’t use this break.
One of the tax code’s notable breaks allows donors a deduction for the full market value of appreciated stock that is publicly traded, up to 30% of adjusted gross income. (Leftover amounts can be carried forward and used for up to five years.) For example, if a Pfizer shareholder purchased shares for $2 each that are worth $32 each at the time of donation, the donor owes no capital-gains tax and can deduct $32 per share. BERLIN (AP) — Volkswagen CEO Matthias Mueller says the company will have technical details on fixing cars fitted with emissions-rigging software to German regulators by month’s end, and most will not need major work. In a letter to consumer advocate Ralph Nader, Yellen says the low rates helped create millions of jobs by lowering borrowing costs for businesses and consumers. LONDON (AP) — The attacks in Paris that killed 130 people and wounded hundreds more are hurting the French economy at a time when the wider 19-country eurozone appears to be growing at the fastest pace in four and a half years, a survey showed Monday.
The Food and Drug Administration says the injectable-drug, Opdivo, is approved for patients with renal cell carcinoma who have previously tried certain other drugs.