Who Can Pfizer Inc. Afford?

AstraZenecaPfizer (NYSE:PFE.US) has shaken out its piggy bank and put all its pennies on the table… and AstraZeneca (LSE: AZN) (NYSE: AZN.US) has still rejected its offer, saying the latest proposal of £55-a-share “undervalues the company and its attractive prospects”.

Pfizer added a statement that it will not take the bid hostile so the question remains: what will it do with the $69 billion of offshore booty? US Senators are working overtime to close the loophole that allows US companies to undertake inversions. Senator Carl Levin, who is the chairman of a committee which targets corporate tax avoidance, said he will act fast to close the loophole and prevent American companies from moving their domicile to low tax countries.

So the clock is ticking… can Pfizer splash the cash before Uncle Sam comes knocking on the door of its Cayman Island deposit box?

The problem for Pfizer lies in that there are not very many other pharmaceutical companies with its required criteria. It requires a pipeline of drugs that will enhance and expand its own portfolio, operational synergies and an in inversion strategy for tax purposes? 

One biopharmaceutical company being mentioned in more than a few places as a good ‘fit’ for Pfizer is Bristol-Myers Squibb  (NYSE: BMY.US). Bristol-Myers, headquartered in New York and valued at $83 billion and slightly cheaper than AstraZeneca, it has an impressive pipeline of medicines, two of its cancer immunotherapies are already in Phase III trials and one in product market development. However attractive the company’s pipeline, it will not give Pfizer the required tax shelter and Chief Executive Officer Ian Read said Pfizer would not consider a US acquisition, given its high tax rates.

Pfizer can avoid repatriation taxes by buying Shire (LSE:SHP). Shire is a company that manufactures pharmaceuticals and looks like a prime candidate for a takeover. Speculators moved in some weeks ago: Allergan has approached Shire in recent months and reportedly made a preliminary offer giving it a valuation of $33 billion — small change for Pfizer…

Shire is Jersey-registered and has its tax domicile in Ireland. Ireland has been attractive for multinationals because it has a low rate of only 12.5% corporation tax. The sweetener for a UK base, however, comes in the form of the tempting “patent box” tax incentives, which attribute a 10 per cent corporation tax rate to profit earned on products patented in the UK.

The AstraZeneca board reportedly signalled that they would be happy to open negotiations with Pfizer for an additional 10% on its last offer of £55-a-share, but stock market rules reduce any wriggle room to keep open negotiations. The deadline for Pfizer is the 26 May to state its intentions, otherwise they cannot offer a revised bid for six months. This could be enough time for US senators to implement legislation that could halt Pfizer’s ambition to become a UK domicile company.

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Lisa Walls-Hester does not own any shares in the above companies.