Pharmaceutical giant Pfizer recently announced that they had agreed to acquire botox maker Allergan in a true whopper of a megamerger deal - Pfizer offered around $363 a share for a total deal value approaching a staggering $160B - for which even the term "Monopoly money" doesn't do justice! It's the biggest healthcare deal ever and is also the #1 tax inversion reverse merge in history, making the combined company the #1 drugmaker on the planet.
The newly minted "Phallergan" or "Pfizergan" will be led by Pfizer's Ian Read, who will be Chairman and CEO of the new entity, and not by Allergan head honcho Brett Saunders as had been rumoured for some time; Mr. Saunders will remain as President and COO, and "will be serving in a very senior role focused on operations and the integration". Having said that, it is widely believed that when Ian Read reaches retirement in 2018, it will be Brett Saunders who will settle into the CEO's chair.
Mega deals are certainly becoming the norm these days, with for example, the imminent merger of Dow Chemical and legendary DuPont for $130B, but such deals have been evident even in the beer business, vis-a-vis the $108B acquisition of SAB Miller by Anheuser-Busch InBev; even though such deals do irk legislators in terms of potentially being "anti-competitive", it is the tax inversion play that is currently creating a firestorm of controversy, particularly in the embattled pharmaceutical industry.
It's one thing for a Burger King to acquire a Canadian staple like Tim Horton's ($12B US) in order to lower its corporate tax rate, but that's coffee and burgers. It's not quite as serious or life-threatening as disease and drugs, where being seen to be ruthlessly stacking up profits at the expense of the sick and the old leaves a distinctly more bitter taste on the tongue. Bringing in sales in the tens of billions of dollars is one thing (and one which has not inandof itself caused much ruckus), but artificially domiciling an American entity on foreign shores for the sole purpose of tax avoidance is seen as insatiable corporate greed.
In the case of the Pfizer-Allergan deal, the advantage for New York-based Pfizer is that essentially they become acquired by Dublin-based Allergan, domiciling them in highly desired Ireland, with tax breaks (from their current 25% down to as low as 17%) that will save them many millions per year. Allergan themselves are more of a New Jersey company, operationally, than Irish, but that's all in the game as they say in the trade. Regulators are watching these deals extremely closely and their actions have scared off some from proceeding, e.g. the $55B AbbVie-Shire deal that went south after a move by US Treasury Sevretary Jack Lew to deincentivise tax inversion deals.
The timing is hardly ideal, what with the current furore involving individuals in the hot seat over pharmaceutical price-gouging, such as J. Michael Pearson of Valeant (themselves a previous tax inversion player) and the globally maligned Martin Shkreli of Turing Pharmaceuticals, among others. The scrutiny such types are receiving from both Congress and the bandwagon-jumping Democratic Presidential candidates (Hilary Clinton and Bernie Sanders) is having an impact on the industry in general, essentially rebranding the pharmaceutical industry as an avarice-laden tax-avoiding moneygrabber.
So what's the reality? Well, working in the venture capital business, clearly I do not have a problem with corporations making profits (huge or otherwise) from expensive investments in hardcore R&D! That those profits come from sophisticated, safe and effective drugs for treating human disease is another no-brainer. As to the desire to avoid paying taxes to the country those drugs were discovered in, well, that is another thing entirely. But, and it's a big but, if the actions taken by giant corporations to avoid or lower their taxes are legal, then who can blame them?! If we could do it, would we?!
Such corporations employ a whole slew of people to help boost the bottom line, and just as they would not ignore advice from their own legal counsel on a strategic business matter, why would they be expected to not take advantage and profit from tax loopholes suggested to them, when the law actually permits it? The solution is very clear - if governments are not happy with tax inversion deals then they need to get off their backsides and do something about it via new legislation - in the meantime, Barack Obama going as far as to call the activity "unpatriotic" is hardly helpful.
But it's funny how we hear that term way more in relation to big, bad pharma, than we do for the much more Obama-sanctioned and socially acceptable Facebook, Google or Apple; at one point it was reported that Google was paying a tiny five percent corporate tax rate, due to tax avoidance manoeuvres. But it's no secret (even if it was) that such companies (Facebook and Google in particular) are reputedly in bed with US intelligence-gathering systems, so then I guess it's okay if they pay minimal domestic taxes and have more offshore-stored cash than anyone in history. In the case of Apple, it was recently estimated that of their $200B cash stash, wait for it, as much as $190B is very comfortably stashed, offshore. The numbers say it all.
Anyway, I think it's also an oversimplification to think of the Pfizer-Allegran deal as strictly a tax inversion play, per se, even if it comes hot on the heels of a failed attempt by Read to acquire AstraZeneca last year, in another (UK) inversion move. There is unquestionable synergy between the two companies' offerings, with Pfizer adding in Allergan brand names such as Botox, Restasis and Namenda onto their considerable roster, which includes Viagra, Lyrica and Lipitor, among many others. Additionally, Pfizer has been rumbling about splitting into two business units for a while now, and this merger would strengthen the argument for an established products unit separated out from their innovative business unit - a decision on that by Read is expected by Q4 2016.
Consolidation of big ticket players and the often-incurred tax benefits is a trend that is causing a lot of controversy in the pharmaceutical business, but it's unlikely to go out of fashion in the near term - I imagine that companies such as Merck (now relegated to #2 in the world) and troubled GSK may well be watching closely and wondering if they could similarly benefit - but if the US Treasury gets its way and enacts new laws in the interim, such megamerger deals may be scuttled. For those that are considering it, the government is watching closely and time may well be running out, so time is indeed very much of the essence!
But it's funny how we hear that term way more in relation to big, bad pharma, than we do for the much more Obama-sanctioned and socially acceptable Facebook, Google or Apple; at one point it was reported that Google was paying a tiny five percent corporate tax rate, due to tax avoidance manoeuvres. But it's no secret (even if it was) that such companies (Facebook and Google in particular) are reputedly in bed with US intelligence-gathering systems, so then I guess it's okay if they pay minimal domestic taxes and have more offshore-stored cash than anyone in history. In the case of Apple, it was recently estimated that of their $200B cash stash, wait for it, as much as $190B is very comfortably stashed, offshore. The numbers say it all.
Anyway, I think it's also an oversimplification to think of the Pfizer-Allegran deal as strictly a tax inversion play, per se, even if it comes hot on the heels of a failed attempt by Read to acquire AstraZeneca last year, in another (UK) inversion move. There is unquestionable synergy between the two companies' offerings, with Pfizer adding in Allergan brand names such as Botox, Restasis and Namenda onto their considerable roster, which includes Viagra, Lyrica and Lipitor, among many others. Additionally, Pfizer has been rumbling about splitting into two business units for a while now, and this merger would strengthen the argument for an established products unit separated out from their innovative business unit - a decision on that by Read is expected by Q4 2016.
Consolidation of big ticket players and the often-incurred tax benefits is a trend that is causing a lot of controversy in the pharmaceutical business, but it's unlikely to go out of fashion in the near term - I imagine that companies such as Merck (now relegated to #2 in the world) and troubled GSK may well be watching closely and wondering if they could similarly benefit - but if the US Treasury gets its way and enacts new laws in the interim, such megamerger deals may be scuttled. For those that are considering it, the government is watching closely and time may well be running out, so time is indeed very much of the essence!
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