The U.S. Treasury Department’s latest attempt at stopping corporate inversions last week spelled doom for Pfizer Inc.’s (New York City) $150 billion attempted takeover of Allergan PLC (Dublin IRL)–what would have been the largest such deal ever–but will likely have less of an impact on similar transactions that have yet to close, like Tyco International PLC’s tie-up with Johnson Controls Inc.
Tax inversions are deals that became popular in recent years in which a U.S. company buys a foreign rival and adopts its lower-tax jurisdiction. Such companies frequently proceed to make more acquisitions of U.S. companies to bring them onto their lower-tax platforms.
In an effort to crack down on what Treasury calls “serial inverters”–companies that have done other tax-lowering deals after inverting–the regulations promulgated last week included a three-year look-back. That means Treasury will disregard three years’ worth of U.S. acquisitions when determining a foreign company’s true size under the tax code.
That complicates the finely tuned math crucial for inversions to work. To reap maximum benefits, shareholders of the inverting company should own between 50% and 60% of the combined entity. Between 60% and 80% also works, but the tax perks are diminished, and above 80%, they are lost entirely.
Now, U.S. companies need an inversion partner that is at least one-quarter their size, and ideally more like two-thirds. When the Allergan deal was struck last year, Pfizer’s market capitalization was about $200 billion and Allergan’s was about $123 billion. Pfizer’s shareholders would own 56% of the combined company.
However, strip out three years’ worth of deals done by Allergan–which Treasury most certainly would consider a serial inverter–that math no longer works. Allergan has 395 million shares outstanding. It has issued about 260 million shares for big deals including the $25 billion takeover of Forest Laboratories and the $66 billion combination of Actavis and Allergan last year.
Stripping those out leaves about 130 million shares, worth only about $31 billion. Under the current merger ratio, Allergan shareholders’ stake in the combined company would likely drop into the high teens. In other words, in the eyes of Treasury, Allergan was likely too small to be Pfizer’s inversion partner.
Investors in other companies pursuing inversions took a more upbeat approach, perhaps because the three-year rule is unlikely to impact them. Tyco, the target of Johnson Controls’ pending inversion, has made few acquisitions in the past three years. The same goes for Canada’s Progressive Waste Solutions Ltd., which is Waste Connections Inc.’s ticket out of the U.S. tax morass. (Source: Wall Street Journal)
Monday, April 11, 2016 / Vol. 24 / No. 14