[Ip-health] New York Times: Pfizer and Allergan Reach $150 Billion Merger Deal

Thiru Balasubramaniam thiru at keionline.org
Sun Nov 22 21:18:22 PST 2015


Pfizer and Allergan Reach $150 Billion Merger Deal

By MICHAEL J. de la MERCEDNOV. 22, 2015

Pfizer has clinched a blockbuster merger with a fellow drug maker, one
worth more than $150 billion, that can best be described in superlatives.

When it is announced — most likely on Monday, people briefed on the matter
said — the deal to buy Allergan, the maker of Botox, would be one of the
biggest ever takeovers in the health care industry. And it would be the
largest acquisition yet in a banner year for mergers.

Perhaps most important, it would be the biggest transaction aimed at
helping an American company shed its United States corporate citizenship in
an effort to lower its tax bill, in this case by billions of dollars. And
it could become a flash point as the presidential race heats up.

A deal would come as the Obama administration is trying to crack down on
these kinds of deals, known on Wall Street and in Washington as corporate
inversions. Last week, the Treasury Department and the Internal Revenue
Service announced new rules meant to further clamp down on the benefits of
such mergers. The government has already lost billions of dollars in
corporate tax revenue from inversions, particularly over the last couple of

New rules introduced earlier this year deterred some companies determined
to pursue inversions, including AbbVie, a drug maker that called off its
planned $54 billion takeover of an Irish counterpart, Shire. Still,
Treasury officials said as recently as last week that only Congress can
halt inversions.

Pfizer and Allergan are taking steps to sidestep the current rules
altogether. Though Pfizer is significantly bigger, with a market value of
$199 billion to Allergan’s $123 billion, it is Allergan that would
technically be the buyer, according to the people briefed on the matter.

Because Allergan already has its headquarters in Dublin — even though the
bulk of its operations are based in Parsippany, N.J. — the planned
transaction could avoid the Treasury rules, which apply to American
companies that buy foreign companies.

But in most respects, Pfizer would lead the combined company, which would
surpass Johnson & Johnson as the biggest drug maker by revenue, with more
than $60 billion in sales. Its product portfolio would run from Viagra,
Celebrex and pneumonia drugs to Botox and the cosmetic treatment Juvéderm.
Analysts do not expect the merger to have much effect on the prices of the
companies’ drugs.

Pfizer’s chief executive, Ian Read, would hold on to that role at the
combined company, these people said. His counterpart at Allergan, Brent
Saunders, is expected to take a top deputy role and a board seat.

The boards of both Pfizer and Allergan voted on Sunday to approve the
transaction, one of the people briefed on the matter said. News of the
votes was reported earlier by The Wall Street Journal.

Representatives for Pfizer, Allergan and the Treasury Department declined
to comment.

Adopting Allergan’s home base of Ireland would yield significant savings
for Pfizer, one of the oldest drug makers in the United States. Its history
runs from producing painkillers during the Civil War to penicillin in World
War II. Pfizer’s tax rate last year was roughly 26.5 percent and is
expected to be about 25 percent this year.

Its prospective merger partner, by contrast, reported a tax rate of just
4.8 percent for 2014, though its rate this year is about 15 percent.

President Obama last year declared that such moves were “unpatriotic.” But
Mr. Read has long argued that an inversion is an important step in keeping
the company competitive with foreign rivals based in lower-tax countries.
Under the current rules, Pfizer must pay American corporate taxes on the
billions of dollars in earnings from international operations if it ever
tries to bring the money back to the United States. (The company kept $74
billion inearnings offshore last year to avoid that bill.)

He had already tried once to shift Pfizer’s home abroad, pursuing a $119
billion takeover bid for AstraZeneca of Britain. That campaign faltered
amid fervent opposition from AstraZeneca and raised the hackles of
lawmakers in the United States and Britain.

But Mr. Read, an accountant by training, has pressed ahead with his dream
of a corporate inversion. Otherwise, he told The Wall Street Journal last
month, Pfizer is fighting “with one hand tied behind our back.”

It was unclear whether the Obama administration would announce additional
rules that would stymie the merger.

Under the terms of the proposed deal, Allergan shareholders would receive
11.3 Pfizer shares for each of their holdings, the people briefed on the
matter said. That is worth about $363.63 a share, or 16 percent higher than
Allergan’s closing price on Friday.

The transaction would also include a cash component, though one of the
people described it as less than 10 percent of the deal’s overall value.

Pfizer shareholders would still own the majority of the combined business.

At more than $150 billion, the takeover would be the biggest in what has
been a stellar year for deal-making, one that has astonished even veteran
Wall Street financiers. Some $4 trillion in transactions had been announced
as of Nov. 19, and this year is on pace to shatter the previous record of
roughly $4.3 trillion set in 2007.

Already, giant deals announced this year include the impending $104 billion
union of the beer giants Anheuser-Busch InBev and SABMiller; the proposed
sale of Time Warner Cable to Charter Communications for $55 billion; and
the pending sale of the data storage provider EMC to Dell for more than $60

Corporate chieftains have turned to mergers at a rapid clip over the last
three years, hoping to spur growth in their own businesses that they have
been hard-pressed to attain on their own.

Pfizer itself has undertaken a number of huge takeovers, including its $68
billion takeover of Wyeth nearly seven years ago. This year, it bought
Hospira, a manufacturer of generic treatments, for about $17 billion.

And Allergan itself is the product of numerous mergers, including those of
Forest Laboratories and Watson Pharmaceuticals. Its Irish headquarters is
the product of a $5 billion merger of two predecessor companies, Actavis
and Warner Chilcott.

Yet in some ways, a takeover of Allergan may eventually be followed by
Pfizer splitting itself up — another trend that has taken hold on Wall
Street in recent years. The bigger drug maker has weighed whether to split
into two companies: one dedicated to higher-growth, brand name treatments
and one focused on slower-growing mature drugs that face pressure from
generic counterparts.

Mr. Saunders of Allergan would be in line to take over one of those
companies if Pfizer ultimately chose to break up, the people briefed on the
matter said.

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