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The New York Times: Pfizer’s Eager to Go, but the Market Has Doubts

But the billions in tax dollars up for grabs in this merger — and in further tax inversions that might follow — have turned the Pfizer-Allergan deal into a political flash point. In a report last month, Americans for Tax Fairness, an advocacy organization affiliated with labor unions, urged the Obama administration to stop Pfizer.  Frank Clemente, the group’s executive director, said, “In the company’s biggest insult to America yet, Pfizer’s merger would allow it to go on enjoying all the benefits of being based here — everything from a publicly educated work force, to an excellent communications infrastructure, to a reliable patent system — without adequately paying to support them.”

This piece appeared in the New York Times.


The stock market isn’t convinced that the biggest tax inversion merger on the horizon — Pfizer’s pending blockbuster deal with Allergan — will be concluded without major problems.

That’s what the share prices of the two pharmaceutical companies are telling us. While their adjusted prices should be converging — if you assume the merger will be completed without significant impediments — the spread remains unusually wide.

“The share prices are telling us that there is a great deal of uncertainty about the merger,” said Ira Gorsky, a strategist at Elevation L.L.C., a brokerage firm.

A core problem for the merger is that while tax inversions have an immense appeal in corner offices, they are wildly unpopular nearly everywhere else. President Obama has called them “unpatriotic,” and the Treasury has already tightened its regulations twice in the last two years in an effort to make them less appealing to American corporations.

Treasury Secretary Jacob J. Lew said in November, after the latest rule revision, “We intend to take further action in the coming months.” That rule-tightening is expected shortly.

It is easy to understand why the Treasury has targeted tax inversions: They allow American companies to avoid paying a great deal of tax to the United States government. Typically, one company — in this case, Pfizer — merges with a smaller company, Allergan, that already has tax headquarters abroad.

In this merger, Pfizer would shift its legal abode from Manhattan to Dublin while retaining its operational headquarters here. The tax savings would presumably be great for corporate shareholders but less immediately attractive for the great mass of American taxpayers, who do not have access to the same loopholes.

Big money is at stake. Using Pfizer’s latest filings, I calculated that the company has more than $160 billion parked overseas, enabling it to avoid or defer billions in tax payments to the United States. While Pfizer says it has other sound business reasons for a merger, it acknowledges that it expects significant tax benefits, opening the company to criticism as a “tax dodger.”

Allergan, a company with a New Jersey base, is no stranger to such criticism either: It moved its tax headquarters abroad in an earlier inversion.

That unpopularity creates political risk. The government might intervene. If it can’t stop the merger outright, it might be able to make it economically unappealing.

“The market just can’t handicap the political risk involved in this deal,” said Umer Raffat, a managing director at Evercore ISI, an investment banking advisory firm. “We don’t know what the Treasury might do.”

It’s not that the merger is in any evident trouble from an antitrust standpoint. Both Pfizer and Allergan continue to say that they expect the deal to be fully approved and completed in the second half of this year. Antitrust authorities in the United States and overseas have not indicated that there are major problems, though some forced divestitures are possible.

But the billions in tax dollars up for grabs in this merger — and in further tax inversions that might follow — have turned the Pfizer-Allergan deal into a political flash point. In a report last month, Americans for Tax Fairness, an advocacy organization affiliated with labor unions, urged the Obama administration to stop Pfizer.

Frank Clemente, the group’s executive director, said, “In the company’s biggest insult to America yet, Pfizer’s merger would allow it to go on enjoying all the benefits of being based here — everything from a publicly educated work force, to an excellent communications infrastructure, to a reliable patent system — without adequately paying to support them.”

Pfizer, on the other hand, says that corporate income tax rates in the United States place it at a competitive disadvantage. It says it paid an effective tax rate of 22.5 percent in 2015 (well below the statutory rate of 35 percent). In 2016, without the merger, it estimates that its tax rate would be 24 percent — but that it would drop below 18 percent within one year if the merger with Allergan took place as planned.

John T. Boris, an analyst with SunTrust Robinson Humphrey, said Pfizer’s true tax rate, after a tax inversion merger, would probably be much lower than that. “There could be a big windfall for Pfizer,” he said.

Pfizer is at the top of most lists of American companies that have collectively stashed more than $2 trillion abroad. In its latest financial statement filed with the Securities and Exchange Commission, Pfizer disclosed it had $80 billion “indefinitely” invested outside the United States, beyond the reach of the Internal Revenue Service.

It also said that it had a “deferred tax liability” of $23.6 billion for an additional, unspecified sum that it has parked overseas but expects to bring back one day. I calculated that the money in this second basket amounted to at least $80 billion. That means that Pfizer has at least $160 billion stashed overseas, up from approximately $140 billion last year. Joan Campion, a spokeswoman for Pfizer, declined to comment.

Whether Pfizer would have more flexibility in using its overseas cash after the merger is an important question for the markets, but the answer is not yet clear. The Treasury is expected to issue further rules within the next several weeks. Stephen E. Shay, a professor at Harvard Law School, said the Treasury “has the prerogative to make a more muscular application of its administrative authority than they have already” regarding taxation of stranded cash controlled by a company like Pfizer.

The Treasury says that congressional legislation would be required to stop inversions entirely. Several bills are pending, including one introduced last week by Senator Sherrod Brown, Democrat of Ohio, but passage in this election year isn’t likely.

At some point, the corporate tax rules may be overhauled. It is possible that the corporate tax rate will be reduced, and that companies might be given a “tax holiday,” a window within which to repatriate foreign cash at a reduced rate. But when and if that occurs is far from certain.

In the midst of this uncertainty, the Pfizer-Allergan deal is being scrutinized by regulators and in the stock market, where both companies’ shares have been battered. Allergan’s, in particular, are trading at a price that is 12 to 20 percent lower than the shares are worth under the terms of the still pending merger with Pfizer.

An easy profit is sitting there for anyone who believes that the deal is a slam-dunk. Ms. Campion said Pfizer continued “to expect it to close in the second half of 2016.” The market consensus, at the moment, however, is that while the deal is still likely to be completed, there are too many variables to make a sound assessment.

There have been some technical problems: Allergan has been delayed in transferring some of its generic-drug assets to another drug company, Teva, and that could delay the Pfizer deal, Mr. Boris said. “With a merger this big,” he said, “you want to do it as soon as you can.”

If the deal does go through and Pfizer is able to save large sums on taxes, that precedent could unleash a torrent of additional mergers, Mr. Shay said. “That’s why I think the Treasury should act now,” he said. “It’s time they got ahead of these deals.”