Abandoned Pfizer deal leaves all sides tainted

April 6, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Pfizer’s abandoned deal leaves all sides tainted. The U.S. Treasury looks bad for changing the rules on Monday to kill the $160 billion merger with Allergan. Lawmakers’ inaction encouraged such tax-driven transactions. But Pfizer and Chief Executive Ian Read bear the most responsibility for wasting time and resources pushing an overpriced, risky deal.

Treasury has now several times tried to close various loopholes that have allowed companies to change their home turf from the United States to countries with more favorable tax regimes. Monday’s new standards directly target Pfizer’s deal, as they disregard U.S. assets acquired in the past three years. That eliminates Allergan and its low Irish tax rate as a target. It’s unclear if the Treasury Department has overstepped its authority. But purposefully and rapidly mutating laws, especially when applied retroactively, are bad for business and legal authority.

Lawmakers emerge covered in tar, too. They could have stopped inversions cold by adopting a territorial tax system. This would have stopped U.S. companies having to pay an extra levy to Uncle Sam on cash earned overseas if local taxes are lower than the U.S. statutory rate. Their fecklessness encouraged Pfizer and other firms to pursue complicated deals where the main payoff is tax avoidance.

Most of the finger-pointing should be directed at Pfizer and Read. This is the second failed mega-deal, after its pursuit of AstraZeneca fell apart in 2014. The Allergan combination was no slam dunk to start with. The net present value of the $2 billion in annual cuts Read proclaimed the tie-up would generate, and the $1.2 billion or so of tax savings, struggled to match the premium offered last November.

Perhaps Pfizer could have found more tax loopholes or costs to cut. But big drug deals tend to promise much on paper and deliver little in reality. The miniscule $150 million Pfizer is paying as a break fee to Allergan indicates it knew the odds were high that the deal might be scuppered. Engaging in such a high-risk venture for little obvious benefit makes a good case for shareholders to question Read’s – and the board’s – decision making.

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