Pfizer Chief Defends Merger With Allergan as Good for U.S.
http://www.nytimes.com/2015/11/24/business/dealbook/pfizer-allergan-merger-inversion.html?_r=0
In
phone calls to Washington lawmakers and Obama administration officials,
the chief executive of the largest drug maker in the nation had a
surprising message: A deal that would allow the company to move its
headquarters to Ireland was actually good for the United States.
The Scottish-born chief executive of Pfizer,
Ian C. Read, told them that a merger with Allergan, the maker of Botox
that is based in Dublin, would significantly cut Pfizer’s tax bill and
give it more cash that it could invest in the United States and
ultimately add jobs, according to people briefed on the calls. He made
the calls in recent days as the two companies were hammering out a $152 billion deal.
Monday’s
announcement of the deal — the biggest merger in 15 years — has revived
a fierce public debate over whether mergers that allow a company in the
United States to relocate to a lower-tax country are, in fact, good for
America.
Pfizer,
founded by German immigrants in Brooklyn in 1849, is becoming the
biggest company yet to shed its American citizenship to lower its taxes.
While not structured as what is known as an inversion, it achieves the
same goal of a lower tax rate abroad.
Record Year of Deal-Making
Giant impending deals announced this year include:
- $104 billion The world’s largest brewer, Anheuser-Busch InBev, maker of Budweiser, will acquire its closest rival, SABMiller.
- About $67 billion Dell is buying EMC in the biggest takeover ever of a technology company.
- $55 billion Trying to succeed where Comcast failed, Charter Communications will buy Time Warner Cable.
An aborted bid by Pfizer to acquire AstraZeneca of Britain in an inversion last year set off a public uproar — leading President Obama to call such deals “unpatriotic” — and prompted moves by the Treasury to curb them.
The latest merger announcement has stirred a similar outcry across the political spectrum.
Hillary
Rodham Clinton, a Democratic candidate for president, said, “We cannot
delay in cracking down on inversions that erode our tax base.”
Donald
J. Trump, a Republican candidate for president, said in a statement:
“The fact that Pfizer is leaving our country with a tremendous loss of
jobs is disgusting. Our politicians should be ashamed.”
Yet
the two companies and their advisers are betting that the Treasury
Department will not be able to come up with new rules to block the
union, and that Congress will fail to revamp the tax code before the
merger’s expected close late next year.
And
as Mr. Read has made clear publicly and privately, his main priority is
doing well by his shareholders — and that means finding a way to
compete with huge foreign rivals that enjoy much lower tax rates.
“We’ve
assessed the legal, regulatory and political landscape and are moving
forward with our strategy to combine these two great companies for the
benefit of the patients and to bring value to shareholders,” Mr. Read
said on Monday on a call with analysts. “That is our obligation.”
Mr.
Read and those close to him have noted that Pfizer, based in New York,
has been upfront about its intentions. Even after its takeover campaign
for AstraZeneca collapsed, the Pfizer chief made no secret of his desire
to try again, while criticizing a tax code that he said leaves his
company fighting with one hand tied behind its back.
The
drug maker, which manufactured penicillin during World War II, has
complained that its tax rate last year was 26 percent, compared with the
approximately 5 percent that Allergan’s predecessor company paid during
that same time.
Bigger
international rivals, from GlaxoSmithKline and AstraZeneca of Britain
to Novartis of Switzerland, also pay substantially less in taxes,
potentially letting them win takeover contests with higher bids.
Perhaps
more important, Pfizer kept overseas $74 billion in profits that were
earned abroad last year, because bringing them home would have racked up
billions of dollars in taxes.
Since
the AstraZeneca bid, the Obama administration has introduced new rules
that have made it harder for companies to do inversion deals, scuttling
efforts by companies like AbbVie, a large drug maker based in Illinois, to relocate abroad.
From
the beginning of their deal discussions nearly three months ago, Pfizer
and Allergan agreed that the best way forward was to forgo an inversion
altogether, according to people with direct knowledge of the matter.
Instead, Allergan would serve as the buyer despite being substantially
smaller.
Mindful
of the sensitivity in Washington, Pfizer included in its advisory team
the boutique investment bank Moelis & Company, whose vice chairman
is Eric Cantor, the former House majority leader.
While
Mr. Cantor will not lobby lawmakers, people with direct knowledge of
the matter said, he has advised the company on political aspects of the
deal and maintains friendly contact with his former colleagues.
Despite
the political uproar, the merger is not expected to encounter
significant resistance from the American regulator that will review the
transaction, the Federal Trade Commission, according to the people with
direct knowledge of the deal.
A
spokesman for the Treasury Department said on Monday that it did not
comment on specific transactions. Still, the department has clearly
signaled its distaste for deals that move a company’s tax home.
The
particular design of Monday’s transaction, however, effectively shields
Pfizer and Allergan from the administration’s efforts to curb such
deals.
Related Tax Inversion Coverage
When
the Treasury Department announced its latest rule changes on Thursday,
advisers to both companies sat down to review the changes — and quickly
went back to work on their negotiations, the people with direct
knowledge of the matter said.
“Treasury’s proposals don’t touch them,” said Robert Willens, an independent tax consultant who examined the deal.
Presidential candidates offered swift condemnation of the transaction all the same.
Such
transactions, Mrs. Clinton said, “take advantage of loopholes that
litter our tax code, distort incentives for investment and disadvantage
small businesses and domestic firms that cannot game the international
tax system.”
Senator
Bernie Sanders of Vermont, a Democratic candidate for president, said,
“The Obama administration has the authority to stop this merger, and it
should exercise that authority.”
Yet others said a broader tax overhaul was needed.
Senator Orrin G. Hatch
of Utah, the Republican chairman of the Senate Finance Committee, said
the news of the merger “only further underscores the arcane,
anticompetitive nature of the U.S. tax code.”
Executives
at both Pfizer and Allergan are betting that Congress will continue to
be conflicted about how to deal with inversions. Republicans, who
control the House and the Senate, have called for a comprehensive
regulatory overhaul and have shown reluctance to focus on particular
companies.
“It’s
not clear what Washington’s wishes are,” said one person close to the
transaction. “We tried to tell them to fix our tax system. It’s not like
this is a surprise.”
At
the same time, both Mr. Read and his counterpart at Allergan, Brenton
L. Saunders, have emphasized that the deal isn’t being done just to cut
taxes.
Both
executives contend the deal gives Pfizer access to fast-growing
treatments in the eye care and dermatology space, as well as brands like
Botox and the cosmetic treatment Juvéderm.
Moreover,
it will give Pfizer enough size and product diversity to break itself
up in three years’ time, dividing itself into a company focused on
faster-growing innovative drugs and another built on more mature
treatments that face competition from generic competitors. The company
said on Monday that it would decide in late 2018 whether to proceed with
a split.
Buying
Allergan will bring more fast-growing treatments to Pfizer’s portfolio.
That would complement Pfizer’s $17 billion acquisition of the generic
drug maker Hospira earlier this year, meant to bulk up its so-called
established treatments division.
Under
the terms of the deal, Pfizer would essentially pay $363.63 for each
Allergan share, representing a nearly 30 percent premium to Allergan’s
share price in late October before news emerged that they were in talks.
That values the acquisition at $152 billion. Including debt and
subtracting cash, the deal is worth $160 billion.
After
the transaction, Pfizer shareholders are expected to own about 56
percent of the combined company, with the remaining 44 percent owned by
Allergan shareholders. Mr. Read will be chief executive of the new
Pfizer P.L.C., to be based in Dublin, while Mr. Saunders will become
president, and will be in line to take over one of the company’s
businesses if and when it decides to break itself up.
Investors appeared unimpressed. Shares of Allergan fell 3.4 percent, while Pfizer’s ended down 2.6 percent.
The
expected cost savings of about $2 billion over the first three years
announced after the deal was made were well below most analysts’
projections. And the $5 billion in planned stock buybacks that also were
announced on Monday were in line with Pfizer’s previous efforts.
Some analysts still regarded the deal positively, so far as it ties into Pfizer’s goals.
“Allergan
was easier to get done as a friendly deal in terms of getting a
structure done and management roles done,” said Jeffrey Holford, an
analyst with Jefferies.
To
some involved in the deal, the tax savings are all that matters. “If
the tax stuff went away entirely, the deal would be off,” a person
briefed on Mr. Read’s thinking said.
Liz Moyer, Chad Bray and Alan Rappeport contributed reporting.
A version of this article appears in print on November 24, 2015, on page A1 of the New York edition with the headline: Chief of Pfizer Defends Merger as Good for U.S.
Pfizer-Allergan Merger Reignites Tax Reform Discussion
WASHINGTON
— For almost four years, Congress and the White House have done little
to make their long-promised overhaul of the corporate tax code a
reality. Now the blockbuster pharmaceutical merger of Pfizer and Allergan has put new pressure on all sides to act.
Pfizer’s
takeover of Ireland-based Allergan — the largest deal to date to avoid
American taxes by reincorporating in a lower-tax country — provoked a
leading Republican on Monday to call for at least stemming so-called
corporate inversions, if a sweeping rewrite of the tax code remains out
of reach.
“The
best way to resolve these issues would be through a comprehensive tax
overhaul,” Senator Orrin G. Hatch of Utah, chairman of the tax-writing
Senate Finance Committee, said in a statement. But, he added, “It’s
imperative we explore what actions can be taken now.”
That
is a shift for Mr. Hatch from an all-or-nothing approach to tax reform,
but sweeping change has remained elusive. In a polarized capital given
more to legislative crisis than to compromise, leaders in both parties
have long claimed that an overhaul of the loophole-laden corporate tax
code could yield common ground. Business groups have clamored to make it
so.
In
a raft of statements from Capitol Hill on Monday, lawmakers in both
parties condemned Pfizer’s move and reiterated their calls for
comprehensive tax reform. But the reiterations only underscored that
talk has long stood in for legislating.
President
Obama’s Treasury Department released a detailed framework for rewriting
the code in 2012, proposing to close corporate loopholes, broaden the
base of taxable business income and reduce the corporate income tax
rates that are sending businesses like Pfizer overseas.
Senior
congressional Republicans were broadly on board with that approach,
which is the same formula — broader tax base, lower rates — that defined
Congress’s previous landmark rewrite of the tax code in 1986, under
President Ronald Reagan.
But
Mr. Obama has hardly made corporate tax reform a priority, and a
reluctance by the generally assertive Republican-controlled Congress to
move without the president suggests that Republicans worry a signature
issue may be better politics than policy. The details inevitably divide
business allies into winners and losers.
“Any
permanent solution to combating inversions should be legislated by
Congress,” Mr. Hatch said. But “for that to happen,” he continued, “we
must have strong leadership from the White House.”
A
Republican chairman of the tax-writing House Ways and Means Committee,
former Representative Dave Camp of Michigan, put forward a comprehensive
plan in 2014 but got little support from party colleagues. His
successor as chairman, Representative Paul D. Ryan, Republican of
Wisconsin, embraced the Camp plan in spirit at least. Then Mr. Ryan was
elevated to speaker last month, and now defers on tax policy to a new,
untested chairman, Representative Kevin Brady of Texas.
In
the Senate Finance Committee, Mr. Hatch — one of the few current
lawmakers who were in office for the tax rewrite nearly 30 years ago —
has not initiated a similar tax overhaul effort since Republicans took
over the Senate in January. Two committee members, Senator Chuck
Schumer, Democrat of New York, and Senator Rob Portman, Republican of
Ohio, have worked toward a bipartisan framework along with Mr. Ryan in
the House — not for a full overhaul of the corporate code, but for a
change in international taxation that would also address inversions.
The
initial impetus for the Portman-Schumer-Ryan effort to overhaul
international taxes was both parties’ desire to come up with billions to
finance the cost of a multiyear transportation and infrastructure bill
this year. The tax bill, in theory, would raise those revenues with a
one-time tax on multinational corporations’ earnings held outside the
United States, and would also provide a new minimum tax on foreign
earnings.
Related Tax Inversion Coverage
But
in recent weeks, with Senate Republican leaders including Mr. Hatch and
Senator Mitch McConnell of Kentucky, the majority leader, cool to the
idea of an international tax package, Congress made progress on a
separate transportation bill, with its costs offset by assorted revenue
provisions and budget changes.
Congressional
Republicans began openly suggesting that they should just wait to
overhaul the corporate tax code until 2017, when perhaps they would have
a Republican president to work with. Then came the Pfizer-Allergan
news, made official on Monday, and once again Americans were learning
that brand-name companies were becoming corporate expatriates to cut
their tax bills, while most of their operations remained stateside, with
all the advantages of American residency.
Twice
since last year, Treasury Secretary Jacob J. Lew has issued regulations
to reduce the incentives for corporate inversions — in September 2014
and just last week. But, he warned, the administration can only do so
much without Congress.
“Our
actions can only slow the pace of these transactions. Only legislation
can decisively stop them,” Mr. Lew told reporters on Friday.
In
the year since the administration first urged Congress to act against
inversions — with Mr. Obama assailing corporate expatriates as
unpatriotic — Republicans and some Democrats have resisted acting. What
was needed, they said again, was a comprehensive overhaul of the
corporate code. Yet again they did not propose one.
While
the Pfizer-Allergan merger had Mr. Hatch and a few others, mostly
Democrats, summoning action specifically against corporate inversions,
many lawmakers fell back on the familiar call for the holy grail of a
complete overhaul of the code.
“Let’s
stop the political hand-wringing and get to work creating a U.S. tax
code that’s built for growth,” said Representative Brady, the new Ways
and Means Committee chairman. “Tax reform is a key pillar of our
pro-growth agenda.”
Senator
Ron Wyden of Oregon, the ranking Democrat on the Senate Finance
Committee, warned against more limited legislation simply to address
inversions, saying on Monday, “The only course of action that will stop
this concerning trend of American firms continuously looking for ways to
shift their headquarters overseas is comprehensive tax reform.”
“Our
tax code and our economy work as an ecosystem, so when Congress or the
administration make changes in one area to solve an immediate crisis
like inversions, there’s always a risk of unforeseen effects popping up
somewhere else,” Mr. Wyden added. “Bipartisan, comprehensive tax reform
will require serious political will and independence from members of
Congress, but this inversion crisis shows that it needs to happen soon.”
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