Daily Management Review

Amid New Inversion Clamp-down in the US, Pfizer Accelerates Talks of Allergan Takeover


Amid New Inversion Clamp-down in the US, Pfizer Accelerates Talks of Allergan Takeover
As the U.S. Treasury prepared to clamp down further on such tax inversions, talks between Pfizer and Allergan for e takeover of the latter for a $150 billion deal would see the U.S. drug giant’s efforts to redomicile in Ireland accelerated on Wednesday.
A person familiar with the discussions said that Pfizer is negotiating a price of $370 to $380 for each Allergan share. Allergan shares ended trading on Wednesday at $310.8 per share.
As companies seek access to new drugs and increased leverage on pricing, a combination of Dublin-based Allergan with New York-based Pfizer would follow an unprecedented wave of consolidation in the pharmaceutical industry.
An agreement is not imminent and its timing remains uncertain following the Treasury's disclosure that it would seek to tighten the rules on inversions even as negotiations have made progress in recent days, the source added.
A U.S. multinational buying a smaller foreign competitor and relocating to its home country is termed as inversions. The aim of inversions, even if only on paper, is primarily to escape U.S. taxation.
Ireland is a common destination. The management of such companies usually stays back in the United States.
"Later this week, we intend to issue additional targeted guidance to deter and reduce further the economic benefits of corporate inversions," according to a letter from the Treasury seen by Reuters.
The letter was signed by Treasury Secretary Jack Lew and addressed to four senior lawmakers: U.S. Senators Ron Wyden and Orrin Hatch, and Representatives Kevin Brady and Sander Levin. All four serve on the Senate and House tax committees. The letter did not name Pfizer.
"We have no further comment beyond what is in the letter, at this time," a Treasury spokesman said. Pfizer and Allergan also declined to comment.
"The fact that American companies, including Pfizer, continue to pursue inversions makes clear that additional steps are needed to stop this trend," Levin said in a statement.
Levin urged Congress to "get off the sidelines and take action to change the law to stop these tax-motivated inversions" as the treasury noted that that it can only do so much on its own.
Treasury took several regulatory actions to reduce the tax benefits of inverting, while also making new deals more difficult as a wave of inversions peaked in September 2014. That slowed deal flow but did not stop it entirely. 
There have been speculations for months about what could come next from Treasury.
According to tax experts, the possible steps might include tightening the rules on two strategies related to inversions - the so-called "earnings stripping" and "skinny down" distributions.
Combating the shifting of U.S. profits out of the country to low-tax jurisdictions is the aim of earnings-stripping rules. Tax experts were however of the view that the treasury has struggled to write new rules on this under present law.
To evade standards for minimum levels of foreign ownership in inverted companies, rules targeting skinny-down distributions are meant to keep U.S. companies from shrinking their operations ahead of inversions.
A  deal would give Pfizer access to Allergan's dominance in the aesthetics and ophthalmology markets, and displace Johnson & Johnson as the world's biggest healthcare group, apart from tax considerations.