In one of the largest corporate deals ever, valued at approximately $160 billion, U.S pharmaceutical giant Pfizer Inc. and its Irish rival Allergan plc announced a merger that would create the world’s largest pharmaceutical company. Under the terms of the proposed transaction, the businesses of Pfizer and Allergan will be combined under Allergan plc, which will be renamed Pfizer plc. According to both companies, the deal is expected to be completed by the end of 2016 and predicted to have more than $25 billion in operating cash flow beginning in 2018.
Pfizer, based in New York, has the blockbuster cholesterol-lowering drug Lipitor® and erectile dysfunction drug Viagra® amongst its many offerings. Allergan, based in Dublin, Ireland, is best known as the manufacturer of the cosmetic drug Botox®. The merger will create some angst amongst politicians, as the combined company’s headquarters will be in Dublin. In a process known as corporate tax inversion, where bigger American companies buy smaller foreign ones and then relocate their headquarters to the location of the smaller company, the move would slash the combined company’s U.S. corporate tax bill substantially.
The U.S. Treasury Department recently unveiled new rules to make it harder for companies to do inversions. However, the Treasury rules alone will likely not stop the merger because former Pfizer stockholders will hold approximately 56 percent of the combined company and Allergan shareholders will own approximately 44 percent of the combined company. The Treasury rules require that an inverted company be tax-resident in its new home country under that country’s rules, not just U.S. law, to pass a test of whether it has 25 percent of its business activity in the new country. A company can be recognized as foreign-based by passing the threshold percentage.