Today shares of Allergan (AGN) fell by 14.77% as investors were skeptical that a buyout deal by Pfizer (PFE) would go through, after the government introduced new tax inversion rules. Back in November of 2015 Pfizer stated that it was going to buy Allergan in a $160 billion deal. Pfizer liked Allergan’s pipeline but the main reason for doing the deal would have been for the saving on its tax bill.
It would perform what is known as a tax-inversion. This is where a company such as Pfizer here in the U.S. buys a company like Allergan in Ireland, and changes the headquarters to Ireland to avoid paying the U.S. corporate tax rate. With such a deal going through it would be the largest deal in history as a tax inversion.
Both companies took steps to ensure that such a transaction would not violate prior tax inversion rules. However, the new rules posted by the Treasury Department would put a damper on this merger. That’s because it would not classify Allergan’s previous acquisitions as part of the newly formed company.
Thus, even with the headquarters in Ireland the new entity would still be considered a U.S. company for corporate tax purposes. Such new restrictions are why there is a high likelihood that the proposed deal may not go through. Considering that it would lose billions of dollars of tax benefits savings, and have to pay more financially to run the company then there is a high probability that the deal will not be finalized.
UPDATE: CNBC is reporting tonight that Pfizer and Allergan will announce cancellation of the deal on Wednesday morning. Pfizer will be required to pay a $400M break fee.
