Will a merger between two of the largest healthcare corporations create a pharmaceutical powerhouse? Pfizer announced its proposed purchase of Allergan in November of last year, a deal that could be worth $160 billion and one of the largest in history, surpassed only by Vodafone’s merger with Mannesman and AOL’s acquisition of Time Warner.
Corporate Inversion from NYC to Dublin
Allergan is headquartered in Dublin, Ireland, whereas Pfizer is headquartered in New York. According to Investopedia, an inversion occurs when a company “reincorporates overseas to reduce the tax burden on income earned abroad.” Making this move would reduce the effective tax rate of the combined companies to about 17% in contrast to the 25% currently listed in their financial reports. In other words, if the Pfizer-Allergan merger goes through, both companies will see less taxes and, thus, higher profits.
Tax inversion has generated heat among current presidential candidates like Hillary Clinton, Bernie Sanders, and Donald Trump. Clinton was quoted as saying:
“This proposed merger, and so-called inversions by other companies, will leave U.S. taxpayers holding the bag. As president, I will fight to reform our tax system to reward growth, innovation, and job creation here in the United States. We cannot delay in cracking down on inversions that erode our tax base.”
The Obama administration has recently started cracking down on corporate inversions. As they currently stand, the US Treasury rules likely won’t impact the merger – but the Treasury has proposed tax laws which may impede future inversion mergers.
Are Antitrust Laws in Play?
Will the Pfizer-Allergan merger violate US antitrust laws, effectively creating a pharmaceutical monopoly? Probably not. Experts say that the deal will gain antitrust clearance and close in the last half of 2016.
For his part, Ian C. Read, Chairman of the Board and CEO of Pfizer, called the deal a “transaction” or a “combination” rather than a “merger” or an “acquisition” on a LinkedIn post in December. He also stated that the new company:
- remains subject to all US tax laws
- will pay federal, state, and local income taxes, as well as social security taxes for all US employees
- will pay property taxes on all US Pfizer facilities
Pfizer and Allergan’s Popular Products
Allergan, member of the S&P 500 and listed on the New York Stock Exchange, was founded in 1948. Its products include Botox and Juvéderm, used by dermatologists for cosmetic enhancements.
Pfizer is a much older company, started in 1849, and is also listed on the NYSE as well as the Dow Jones Industrial Index. Pfizer’s prescription drug developments include such heavy-hitters as:
- Viagra, for erectile dysfunction
- Lipitor, a cholesterol drug
- Lyrica, for neuropathic pain
- Celebrex, an anti-inflammatory pain medicine
Pfizer also sells over-the-counter products such as Advil, Centrum, ChapStick, Preparation H, and Robitussin.
All This Merger for Little Payoff?
Although stockholders may rejoice in the Pfizer-Allergan merger, Business Insider warns that many huge mergers don’t end well.
- After Symantec bought Veritas in 2005, it sold Veritas off again in 2015 for a loss of about $5.5 billion.
- Hewlett Packard purchased Electronic Data Services in 2008, but since then HP has struggled, issuing repeated layoffs, with another round in the works.
- In 2000, Verisign purchased Network Solutions but was forced to sell off the domain registration arm for violating the US Securities Act.
Allergan’s CEO, Brent Saunders even hinted that the mega-pharma company’s future may be cloudy. Speaking at a conference, he conjectured that the combined company might split in as few as two years from now, in 2018. He said a breakup would be contingent upon “maximizing value for shareholders.”
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