By Mark Terry, BioSpace.com Breaking News Staff
After a second failed attempt at a big tax inversion deal for Pfizer (PFE), it wouldn’t be unreasonable for investors to question the company’s leadership decisions. However, investors have indicated they support the company’s chief executive officer, Ian Read, and his strategies. The overall consensus appears to be that Read did his best both times to follow the rules, but that the rules were rewritten to foil his strategy.
In 2014, Pfizer abandoned its attempt to acquire UK-based AstraZeneca (AZN) for about $118 billion. AstraZeneca’s board turned down the proposal and Pfizer declined a hostile takeover attempt. AstraZeneca’s argument was that the bid of 53.50 pounds per share undervalued the company and would need at least 58.85 pounds per share to consider the deal.
However, another key component of that deal’s failure was political opposition in Britain, Sweden and the U.S. U.S. officials expressed concern over loss of jobs, as well as loss of tax dollars, and were busy making minor rule changes to make the deal more difficult. At that time, Britain’s deputy prime minister, Nick Clegg, indicated the UK government might use legal steps to block the merger, primarily by applying to the EU to extend what is called a public interest test, as part of The Enterprise Act.
As described in The Telegraph article, “The Enterprise Act allows UK competition authorities to intervene in international takeovers but only in deals concerning national security, media plurality and financial stability issues.”
Although some attorneys felt that applying The Enterprise Act to the Pfizer-Allergan deal was outside the European Commission’s powers, David Cameron, the UK Prime Minister, indicated he would do “what is right for Britain” regarding the Pfizer-AstraZeneca merger.
The most recent inversion attempt, between Pfizer and Dublin-based Allergan (AGN), was scuttled over new U.S. Treasury Department rules that would have made the deal almost impossible. Although there were two major components to the 300 pages of rules, one focusing on serial inversions and the other on earnings strippings, it was the serial inversions components that really appeared to be aimed at ending the Pfizer-Allergan deal.
This part allowed the government to ignore U.S. assets acquired by potential inversion companies over the last three years. Allergan as it exists now is the result of a series of mergers that really picked up steam in 2013 when Actavis (ACT), a New Jersey company, was bought by Ireland-based Warner Chilcott PLC. Several more cross-border deals ensued, culminating in 2015 with the acquisition of Allergan by Actavis for $66 billion and changing the company’s name to Allergan.
The guidelines for meeting an inversion are very strict regarding the percentage and size of the acquired companies. Passing regulations that ignored the current value of the company, ignoring the last three years of mergers, pushed Allergan outside the tax guidelines.
Investors and analysts are indicating that Read is not at fault for any of this, and it made sense not only for him to try and cut Pfizer’s corporate tax bill, but to attempt to access billions of dollars the company has in offshore accounts that it can’t use in the U.S. without paying 30% or more in taxes.
“Read gets an ‘A’ for effort,” Gary Bradshaw, a portfolio manager for the Hodges Funds in Dallas, told Reuters. “It was the right move for him to give Allergan a shot.”
Oliver Marti, a portfolio manager with Columbus Circle Investors, concurred, noting that Read “has made some very smart decisions,” including the Allergan deal. “You work with the rules as best you can to win the game,” he told Reuters. “Unfortunately, the Treasury has abused its authority and made up its own rules.”
And Read gets a big vote of confidence from Brent Saunders, who was going to be the new president and chief operating officer of the newly merged Pfizer plc. The Allergan chief executive officer told Reuters, “While I’m sure Ian is personally disappointed, he hasn’t skipped a beat and is absolutely focused on Pfizer and its independent future.”