Pfizer and Allergan's Huge $160 Billion Inversion Deal

The U.S. Treasury has been trying to hinder such deals since Medtronic's roughly $50 billion purchase of Covidien. It apparently isn't working.

Nancy Crotti

Pfizer apparently wants to prove that there's more than one way to avoid U.S. corporate taxes. The New York-based biopharmaceutical giant agreed today to buy another big pharma company, Allergan, for $160 billion.

The combined company would be called Pfizer, set up shop in Allergan's relatively new corporate home of Dublin, Ireland, and pay corporate taxes to that country. That's despite stricter U.S. Treasury rules that came out November 19 to dissuade U.S. companies from combining with foreign firms in such so-called tax inversion deals.

The $160 billion deal dwarfs Medtronic's roughly $50 billion acquisition of Covidien early this year, which allowed it to move its official headquarters from Minnesota to Ireland. Medtronic became the second-largest medical device company in the world through the deal.

The new U.S. Treasury rules partly came out because of criticism of the Medtronic-Covidien deal. But Pfizer and Allergan executives appear to have found a clever way to get around the rules. 

Allergan, the maker of Botox, would be listed as the buyer, even though Pfizer--which makes Viagra as well as infusion pumps through its $17 billion acquisition of Hospira--would exchange 11.3 shares of its stock for every share of Allergan. Pfizer directors would dominate the board with 11 seats to Allergan's four, and Pfizer chair and chief executive officer Ian Read would hold those titles in the combined company. Allergan's CEO would become president and chief operating officer of the new Pfizer.

Allergan moved its headquarters to Dublin after Actavis Plc, which then took Allergan's name, purchased it in March.

An Ireland-domiciled Pfizer's tax rate would drop from about 25% this year to about 15% next year, according to a report in the New York Times.

That's if it goes smoothly. President Obama and Congress may have failed to block the Medtronic-Covidien inversion deal. But they will undoubtedly push back harder at this latest through-the-looking-glass scenario.

While the Treasury Department can't technically block inversions, its new restrictions specifically seek to curtail the ability of U.S. companies to merge with foreign firms. The restrictions would also curtail an inverted U.S. company from transferring its assets to a foreign country without paying taxes to the U.S. government. The new restrictions would cover all inversions completed on or after September 22, 2014, including Medtronic's aforementioned buy of Covidien.

Pfizer is contemplating breaking up its business into two business units--a decision it has said it will make by the fourth quarter of 2016. One business unit would specialize in new products while the other would focus on older, soon-to-be generic products. Pfizer said Monday that it would decide on the split by the end of 2018.

Allergan's market value is approximately worth $122 billion, while Pfizer's is about $206 billion. If shareholders and regulators approve, the transaction could close in the second half of 2016.

Nancy Crotti is a contributor to Qmed and MPMN.

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