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After months of anticipation, the US Department of Treasury issued new rules about so-called tax inversions that raised uncertainty about the $160 billion merger deal between Pfizer and Allergan.

The rules are designed to curb inversions, which effectively reduce federal revenue and, as a result, have been widely criticized as unpatriotic and detrimental. In these deals, a US company buys a foreign company and reincorporates headquarters overseas where corporate taxes are lower. The acquiring company can reduce taxes by adding debt to its US unit and shifting profits overseas.

For these reasons, such corporate maneuvers have become increasingly popular in the pharmaceutical industry, and the deal between Pfizer and Allergan would be the largest-ever such inversion. But the Treasury department appears to be eyeing this pending transaction specifically as it seeks to make inversions more difficult to accomplish. Allergan stock fell 21 percent in after-hours trading, suggesting investors think the deal may be dead.


“We are conducting a review of the US Department of Treasury’s actions announced today. Prior to completing the review, we won’t speculate on any potential impact,” Pfizer and Allergan said in a joint statement.

While this marks the third time the Obama administration has issued rules to curb inversions, Treasury Secretary Jack Lew acknowledged that more must be done and urged Congress to pass new legislation to mitigate these deals. “Ultimately, the best way to address inversions is to reform our business tax system,” he said in a statement.


The new Treasury rules would make it harder for a foreign company to acquire several US companies in a three-year period of time. And “it seems that the new rule captures the Allergan situation,” Sanford Bernstein analyst Ronny Gal wrote to investors (you can read a fact sheet here, and the rules here and here).

How so? The government wants to thwart companies that pursue multiple inversions by disregarding US assets they acquire over the previous three years. And this new rule is immediately binding.

Keep in mind that Allergan was once known as Actavis. Now consider that, in 2013, Actavis reached a deal with Warner-Chilcott, another drug maker that was domiciled in Ireland, where the corporate tax rate is lower than in the US. The next year, Actavis bought Forest Laboratories and then acquired Allergan, but now uses the Allergan name.

Under the new rules, those deals would be disregarded. By removing those deals from Allergan’s market capitalization, the company may not be able to pursue an inversion with Pfizer. Under federal regulations, the shareholders of a US company are supposed to own between 50 percent and 60 percent of the newly merged company. The Pfizer and Allergan deal would give Pfizer shareholders 56 percent of the merged company, but if you strip away these acqusitions, Pfizer shareholders would own close to 80 percent of the new company.

Americans for Tax Fairness, a nonprofit advocacy group, estimates that Pfizer is attempting to dodge approximately $35 billion by merging with Allergan.