Pfizer Inc. is currently in the middle of private discussions to acquire Allergan Plc in a deal dubbed as the largest ever in the drug industry. According to the reports, the New York-based company is purchasing the Botox manufacturer and Irish rival for $150 billion. Unfortunately, the U.S. Treasury Department's effort to crack down on tax inversion deals could delay the final agreement and change the terms of any transaction.
On Thursday, the U.S. Treasury Department clamped down on tax-avoiding "inversion" deals that U.S. companies do with foreign corporations, which could affect the imminent acquisition deal of Pfizer and Allergan. In inversions, Reuters noted that a U.S. company purchases a smaller foreign rival and relocates, at least on paper, to its home country. Even though core management usually stays in the United States, the merged company is no longer U.S.-based. Thus, the American government takes several steps, including making inversions harder to do by limiting a U.S. buyer's ability to establish a new foreign parent in a third country.
Moreover, the Treasury also said they are also reducing the acquirer's ability to "stuff" assets into a foreign parent to meet existing limits on post-inversion ownership levels. They are also narrowing an existing rule to by limiting the ability of an inverted company to transfer its foreign operations to the new foreign parent without paying U.S. taxes.
"While we intend to take additional action in the coming months, there is only so much the Treasury Department can do to prevent these tax-avoidance transactions. Only legislation can decisively stop inversions," Treasury Secretary Jack Lew said in a statement outlining the new rules.
The Treasury Department's plan, which was released after the market closed Thursday, are effective immediately and some retroactive to Sept. 22, 2014, when the department last clamped down on the transactions, Bloomberg Business reported.
Meanwhile, Pfizer and Allergan are in talks to structure a deal in a way that the latter would be the one acquiring the Viagra drug maker in spite of the fact that Pfizer would technically be paying a premium for Allergan's shares. The two drug-making companies didn't come up with the deal as a result of the Treasury's initial letter on inversions Wednesday, but such structure may make it easier for Pfizer to achieve an inversion deal with Allergan.
Unfortunately, experts said that because of the Treasury's plans, there are chances that the Pfizer-Allergan deal will go through a hinge. While the Treasury Department doesn't have the power to block an inversion, it could still limit the economic benefits of the deal.
"These actions further reduce the benefits of an inversion, and make these transactions even more difficult to achieve," Treasury Secretary Jack Lew said on a teleconference with reporters Thursday, as per Washington Examiner.
The U.S. Treasury Department also stressed that Thursday's announcement is not directly aimed at the potential Pfizer-Allergan deal. The administration's intent, however, is "really to look at the law and see what administrative steps we can take to make the law clearer and also implement the intent of the law."
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