Pfizer and Allergan: Viagra Meets Boxtox

I can't wait to hear the late night talk show hosts talk about a merger between the makers of Viagra and Botox!  But we'll confine ourselves here to the more technical aspects of this deal.  There are many interesting aspects to this one including the size of the deal, the continuation of industry trends, the creation of a giant in Pharmaceuticals, the current price movements of the bidder, target and competitors, the possibility of an inversion, and the social terms of the deal.

First, this deal could be the largest deal of the year as Allergan has a market cap of $112.5 Billion and Pfizer has a market cap of $219 Billion - this year is on pace to be the biggest year yet in M&A.  Second, it continues the consolidation trends we have seen in the pharmaceuticals industry.  Third, it creates the world's largest drugmaker.  The combination would surpass Johnson and Johnson (currently valued at $278 Billion).

The deal would be an inversion, as Allergan is headquartered in Ireland with a far lower tax rate than Pfizer faces in the US.  Expect the US government to seek to impose restrictions on the move putting the tax benefits of an inversion in question.  See our posts about inversions (here, here and here) and the folly of governmental attempts to restrict inversions rather than addressing the root issue and making domicile in the US more attractive.

The price movements at the announcement were typical for the bidder and somewhat abnormal for the target.  The bidder lost a few percent while the target shares rose only 8%. Typical price jumps for the target would be in the 20% - 40% range.   

We've noted many times in these pages about the impact of mergers on rivals.  In particular, our research has shown how the rivals of bidders and targets react to deals involving a competitor.  In today's case, the Guardian reports that the prices of two competitors (GlaxoSmithKline and Shire) declined in value as there was some anticipation that they would be Pfizer's target instead of Allergan.  This illustrates both the anticipation effects embedded in a firm's stock price and the reaction when those anticipated effects are put into question.  Many social terms of the deal remain to be determined, including what happens to Allergan's CEO and how many layoffs might occur as part of the deal.  

One senses that in this market, there is more to come.  There will be a lot to talk about during our December course in Amsterdam.

All the best,

Ralph 

Mergers and Taxes, A Follow Up on "Inversions"

Last week we commented on the increased number of "inversions" where a US firm is merged into a foreign firm to become domiciled in a more tax friendly country.  (See Politics, Taxes and Economic Reality.) Our argument was for recognition of the economic reality of the marketplace and the need for companies and countries to remain competitive.  Countries with unfavorable tax environments will lose business.  An unproductive tendency, we warned, is for countries to try to set up roadblocks inhibiting the laws of economics.  These attempts are generally unproductive and can create unintended consequences that only exacerbate the situation.

Indeed, an interesting blog from the Deal Lawyer, points out that the Treasury department has already implemented steps to prevent or slow down these inversions.  According to the article, current law states that the existing shareholders of the US firm must end up owning no more than 80% of the new company to create an inversion.  The law is being changed, however, to require existing shareholders to own less than 50% after the deal is complete.  Obviously, acquiring companies are not going to be anxious to give up such control.

The end result will be a rush to complete these deals before the new laws take place at the end of this year.  A better long term strategy for the United States or any country is to recognize the economic reality faced by business and understand motivations for the inversions.  Imprisoning business with uncompetitive laws may work in the short run.  It will never work in the long run.

All the best,

Ralph

Politics, Taxes and Economic Reality

I don't know anyone who enjoys paying more in taxes than is required but taxes are important and vital to our country.  So is the necessity of creating an environment where business can compete and win.  The Wall Street Journal noted that Pfizer is changing its headquarters from the US to enjoy a considerably lower tax rate abroad.  The article goes on to note that these inversions, as they are called, are created by merging into a company in a different country and are becoming more plentiful.

Many things remain the same for Pfizer.  It will still use New York as its operational headquarters, for example, and still widely market its products in the US.  One thing that will change is the lower tax revenue the United States will receive.

The article notes that Pfizer is fully complying with all laws and will continue to pay taxes as required in the United States.  Nevertheless, I fully expect we will hear more from politicians about Pfizer and other companies initiating these moves.  In other circumstances, politicians have created laws forbidding actions 'undesirable to the state' or heavily taxing 'undesirable' actions.  Indeed, such laws are one of the motivations for Pfizer's shift: the move will permit more tax favorable flexibility in utilizing off-shore funds rather than face hefty US taxes under current law.  It has long been argued that more reasonable and creative laws for the use of off shore funds would aid companies and increase tax revenue for the US, but changes have not been forthcoming.  

Many politicians seem to believe that the laws of economics can be ignored or worse, that their own laws are superior in creating  a more desirable world.  In the worst cases, laws are created by politicians without full analysis of the details or even recognition of possible unintended consequences.

In the end, the laws of economics prevail and the countries of those who ignore these laws suffer the consequences.  Instead of creating barriers or lamenting loss of business, energy would be better spent in working to make the business environment of our country more competitive.   That includes a hard look at the tax codes and the economic reality of the world.

All the best,

Ralph