New US tax rules jeopardizing Pfizer's merger with Allergan

The move to limit tax inversions by the US government has wiped $20 billion off the share price of Ireland-incorporated Allergan (NYSE: AGN), which broadly equates to the tax benefit arising from US pharma giant Pfizer (NYSE: PFE) merging with Allergan in a massive $160 billion deal (The Pharma Letter October 10, 2015), according to an expert.

Late Monday, the US Treasury Department issued new regulations which further inhibit corporate inversions. The rules call for the incorporation of previous inversion transactions (within three years) when calculating ownership percentages in an inversion, which can have drastic implications for Allergan and Pfizer. The announcement sent shares of Allergan down by 21.9% in after-hours trading on Monday, as its merger with Pfizer will likely be terminated.

According to John Colley of Warwick Business School, UK, a Professor of Practice in the Strategy and International Business Group and who researches large mergers: “In effect this ruling is casting doubt on the proposed merger which appeared to be based more on the $21 billion tax benefits of a Dublin head office than any other mutual benefits.