Pfizer said to terminate US$160b merger with Allergan in victory against tax inversion

A company logo is seen at a Pfizer office in Dublin, Ireland.
A company logo is seen at a Pfizer office in Dublin, Ireland.PHOTO: REUTERS

NEW YORK (BLOOMBERG) - Pfizer has decided to terminate its US$160 billion (S$216.6 bilion) merger with Allergan, a person familiar with the matter said, marking an end to the largest-ever health-care acquisition as officials in Washington crack down on corporate inversions.

Pfizer will need to pay a US$400 million fee to Allergan for expenses relating to the deal, the person said, asking not to be identified as the information is private. Allergan, which is run from New Jersey but has a legal domicile in Dublin, last year agreed to merge with Pfizer in a deal that would have given the New York-based company a foreign address and a lower tax rate.

The decision represents a victory for President Barack Obama, whose administration on Monday proposed tougher-than- expected new rules aimed at making inversions like the Pfizer-Allergan deal harder to achieve. In an inversion, a US company shifts its tax address overseas, often through a merger. In the Pfizer-Allergan deal, the new company would have been located in Ireland.

The Treasury Department said Monday that new rules would limit companies' ability to participate in inversion transactions if they've already done them within the past 36 months. Allergan has been involved in several such acquisitions in that time frame. Representatives for Pfizer and Allergan declined to comment.

Prior to April 4, Allergan "was a great fit," Bloomberg Intelligence analyst Asthika Goonewardene said via e-mail. But the new policies would have stretched the combined entity's ability to garner the favorable Irish tax rate, he said.

Pfizer had been examining how it might be able to challenge new rules from the US Treasury Department, people with knowledge of the matter said earlier.

From the moment it was announced last November, the Pfizer-Allergan transaction drew criticism from US public officials and from both Democratic and Republican presidential candidates. Obama on Tuesday told reporters that inversions make "hardworking Americans feel like the deck is stacked against them."

Since the first inversion in 1982, 53 US companies have shifted their tax addresses offshore - 22 of them since 2012.

Pfizer has said it has strategic reasons for pursuing the acquisition, though it would also help the company escape the US's 35 per cent tax rate, which applies to profits made anywhere in the world.

Ever since a tax-law change in 2004, the main way that US companies have been able to claim a foreign address has been to buy a smaller company abroad and adopt its domicile. The law requires the foreign company to be at least one-fourth the size of the US one. Monday's proposed rule tightens that restriction by saying that if a foreign company has bulked up through mergers with other US companies in the last three years, as Allergan has, that additional bulk isn't counted toward its size.

Treasury officials have said they weren't targeting any particular taxpayers with the new rule.

"It is fair to say the administration would be pleased if corporate inversions that happened solely so corporations don't pay their fair share won't go through," Josh Earnest, a White House spokesman, said Tuesday during a press briefing.

CNBC reported earlier that the two companies would mutually end their planned merger, without naming its sources.

Buying Allergan would have given Pfizer medications to add to its specialty drug unit. It also wasn't the first time the two companies explored a deal. In 2014, Pfizer was said to have approached what is now Allergan about a takeover, Bloomberg News reported.  Pfizer has had other M&A setbacks in recent years. In 2014, the US drugmaker abandoned its effort to buy AstraZeneca Plc after its London-based competitor rejected its offer. Allergan's shares slumped 15 per cent to $236.55 in New York on Tuesday on concerns about the impact of the new Treasury rules. Pfizer closed 2.1 per cent higher at $31.36.

The government has previously upended deals with policies designed to block tax inversions. Eighteen months ago, a similar US proposal was successful in halting AbbVie's US$52 billion cross-border takeover of Shire Plc, after the Treasury Department released a proposal designed to limit the benefits of U.S. companies shifting their tax addresses overseas for a lower rate.

In 2014, AbbVie pinned the blame for ending its deal on the US government. The 2014 tax proposals "reinterpreted longstanding tax principles in a uniquely selective manner designed specifically to destroy the financial benefits of these types of transactions," AbbVie said in a statement at the time.

The Treasury's new rules may make it harder for non-U.S. domiciled companies that have completed numerous recent transactions to buy or merge with American companies in the future and still keep their offshore addresses and lower global tax rates.