Updated on April 9, 2016: This week the US Treasury Department unveiled sweeping new regulations on corporate inversions that were largely unexpected in strength by the finance and legal community. Because the new regulations reduce the benefits of the Pfizer-Allergan deal, the two companies dismissed their planned merger in a victory for progressive and nationalist activists. Pfizer paid Allergan $150 million to cover expenses related to terminating the deal. Law firms that were associated with the deal such as Cravath, Swaine & Moore are currently studying the myriad of new rules and their implications on proposed corporate inversions in the future.Operating a multinational corporation can be polemic. American pharmaceutical giant Pfizer
In November, Pfizer announced that it had reached a merger deal with Allergan valued at over $150 billion. Pfizer would technically be bought out by Allergan, the smaller company, and have its corporate headquarters moved to Ireland, shedding both US citizenship and corporate income tax burden. In 2014, Pfizer paid about a 26.5 percent effective tax rate while Allergan paid a 4.8 percent effective tax rate, and Pfizer is expected to pay 25 percent to Allergan's 15 percent for 2015, according to the New York Times's "Pfizer and Allergan Reach $150 Billion Merger Deal." The carefully crafted merger deal is legal within current Treasury Department regulations and would save Pfizer at least $35 billion in taxes. So it is clear that financial advantages are the impetus behind the merger.
Criticism of the deal has grown in the US. Although President Obama, who in the recent past called corporate inversions unpatriotic, has yet to state a definite position, other political figures have blasted Pfizer. Senator and Democratic presidential candidate Bernie Sanders (I-VT) has said that the deal will hurt American consumers and urged the Obama administration to stop the deal. Democratic presidential candidate Hillary Clinton also criticized the merger in an anti-corporate message. Republican presidential Donald Trump slammed the deal as "disgusting," part of his hate for American companies' outsourcing with globalization. On the populist side, progressive groups such as Credo Action, Daily Kos, and Public Citizen have circulated a petition calling on Congress, which has plenary power over M&A regulations, to block the merger. These activist groups have sent over 140,000 signed petitions to progressive champion Senator Elizabeth Warren (D-MA). Surely Pfizer will continue to feel pressure from progressives and nationalists alike.
Of course, Pfizer has defended the deal and found some allies. Its chief executive officer Ian Read defended the deal as "great for America." He stated that it would allow Pfizer to continue investing $9 billion of spending in the US. Congressman Kevin Brady (R-TX) and Senator Ron Wyden (D-OR) stated that more Treasury regulations will not work; the real solution is corporate tax reform. Other Republican politicians have concurred. The Cato Institute, a libertarian think tank, argued that the Pfizer inversion is good for American workers, consumers, and shareholders, and it pushes the US to adopt a territorial corporate income tax system.
Pfizer was created in New York in 1849, boasting a rich American history. Experts were also surprised at the news because Pfizer's chief lobbyist is the daughter of one of President Obama's most generous benefactors. Now they predict the deal will go forward. Whatever the answers, there remains a debate about patriotism and capitalism surrounding the Pfizer controversy.
The author does not hold any positions in any of the stocks above.
