The deal is off. A source privy to the details on the billion dollar Allergan and Pfizer deal now claims that both of them have mutually agreed to end the partnership, and they're set to announce it on April 6.
Although information pertaining to this new development is scant, business analysts believe that the $160 billion deal, the biggest so far in the pharmaceutical industry, has been significantly affected by the new tax rules on corporate inversions released by the Treasury Department and Internal Revenue Services (IRS).
These rules are designed to rein in tax inversions and earnings stripping, which have been known to be taken advantage of by some multinational companies. According to a report by CNBC, the update on the rules is what made Allergen and Pfizer terminate the deal.
Tax inversion refers to the acquisition of an offshore corporate entity and transfer its headquarters overseas without shutting down its significant business operations in the United States. It is a strategy that has become popular among those that want to escape the country's corporate tax rate of 35 percent.
Inversion is often accompanied by earnings stripping, a form of internal borrowing wherein offshore companies lend to U.S. subsidiaries, usually for operating expenses, and then use the interest for repayments as deductibles to lower taxable earnings.
Although the regulations do not specify any company or industry, it can hurt those like Allergan, a Botox drug maker, which has a long history of acquisitions and mergers. The company is located in Dublin, Ireland, where the corporate tax rate is only 12.5 percent.
For two companies get the perk from inversing and enjoy full economic benefits like accessing foreign profits, the U.S. company share on the merger should be between 50 and 60 percent.
With the new rules, the Treasury can ignore Allergan's U.S. assets acquired within the last three years, including $66 billion deal with Actavis, which will bring Allergan's closing market capitalization below $106 billion.
This will make it harder for Pfizer to meet the inversion requirements as their share could already go up from 60 to 80 percent, perhaps forcing them to end the deal.
The agency is also set to reduce the benefits enjoyed by these inverter companies through earnings stripping including permitting the IRS to classify debt instruments as part equity or part debt instead of treating them as whole equity or whole debt.
The Pfizer-Allergan deal, which was sealed last November 2015, is supposed to be completed later in 2016. At the height of the announcement of the new tax rules, both companies had issued a terse joint statement.
"We are conducting a review of the U.S. Department of Treasury's actions announced today. Prior to completing the review, we won't speculate on any potential impact."
