Pfizer Inc & Allergan Inc Have Fallen Out Of Love, But What Does This Mean For Astrazeneca Plc & Shire Plc?

Tax inversions have been a thing among US companies since the early 1980’s. However, over time the number of companies seeking to redomicile has grown, as has the value of the deals and the associated tax revenues lost by the US government. There have been more than 50 such deals since the 1980’s, although almost half of these have taken place between 2012 and 2016, suggesting that the number of US based companies seeking to invert has increased notably in recent times.  

The previously proposed tie up between Pfizer Inc (NYSE: PFE) and Allergan Inc (NYSE:AGN) was the largest such deal ever to have been attempted, with the price tag that Pfizer was prepared to pay being in excess of £100bn. Ever since rumours of the purchase first began to circulate, legislating to prevent such corporate manoeuvres has been a top priority in Washington.

The last laugh

Last week, in the absence of action from Congress, the US Treasury Department had what appears to be the last laugh on the inversion issue, at least as far as the Pfizer-Allergan deal is concerned. While acknowledging that inversions cannot be stopped without legislation from Congress, the US Treasury announced a wave of new measures that will make it more difficult for some US companies to invert.

The new rules have already had an effect as, on Wednesday afternoon, both Pfizer and Allergan announced that they will no longer be going ahead with the merger and will instead, go their own separate ways. The news prompted strong gains across the London pharma sector, with shares in Astrazeneca (LSE: AZN) and Shire (LSE:SHP) each rising by almost 5% as traders speculated that Pfizer could soon be back on the acquisition trail in London.

The rub

Whether or not the US Treasury’s new rules will eliminate the practice of inversions, or even just reduce the prevalence of them, still remains to be seen. However, one thing that is for sure is that, in an election year, corporate taxes and tax inversions will make for a brilliant political football. It seems possible, maybe even likely, that Congress comes under increasing public pressure to get its act together on the subject of inversions and to legislate in order to prevent them.

Regardless of whether they do or don’t, the US Treasury department seems determined enough to make life difficult for corporate tax avoiders and this alone should probably provide cause for concern among speculators hoping to see Pfizer back in London. It seems clear from the announcement that it does not take issue with genuine mergers and acquisitions, which take place for non tax purposes, but that when companies use M&A to avoid taxes they will act where possible.

Strategic sense

If Pfizer or any other company seeking to invert could demonstrate that an acquisition in London would make strategic sense for the business, for growth or efficiency’s sake, then it seems possible that they would have a ‘get out of jail free card’ on the subject and they may then be able to carry out an inversion in disguise.

However, with two empty pipelines between them, as well as two sets of revenues exposed to patent expiration induced decline, it is less clear as to whether a merger with either Astra or Shire would make any kind of strategic sense for Pfizer once the obvious tax benefits are set aside.

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