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Pfizzling benefits

19 November 2015 By Robert Cyran

Pfizer’s $150 billion Botox gambit is high-risk, low-benefit. If the drug giant buys Allergan, as news reports suggest it wants to do, it would gain a low-tax domicile in Ireland, one very lucrative drug and a bunch of less attractive ones. At the reported price, however, Allergan would accrue nearly all of the obvious financial upside. Pfizer would be left with a possible integration hangover – and tax savings that might disappear.

The higher rate Pfizer pays compared to rivals domiciled in other jurisdictions has long stuck in the craw of Chief Executive Ian Read. In addition to higher payments to the authorities, it creates a disadvantage when chasing acquisitions. Companies facing lower taxes, including Allergan, Valeant Pharmaceuticals and Shire, can justify paying higher prices in M&A battles.

Buying Allergan would finally satisfy Read’s ambition to change Pfizer’s tax address. The combined company would be domiciled in Ireland. And it would check another box, as Allergan’s chief executive, Brent Saunders, would be a natural successor to the Pfizer boss, who is nearing retirement.

Pfizer would have to pay up for the privilege, though. Cutting Pfizer’s tax rate to 15 percent would save $2.1 billion in 2017 based on analysts’ estimates. At a multiple of 10, that’s worth just over $20 billion. At the reported deal price, Pfizer would be paying a premium of more than $35 billion for Allergan based on its undisturbed price.

Some of the difference might be made up by cutting costs. If Pfizer could reduce expenses by $2 billion a year, as JPMorgan suggests, these savings could be worth about $15 billion after applying the lower tax rate, a similar multiple and a 10 percent discount for the time it would take to implement cuts. Add it up, and the deal’s cost and tax savings are worth about the same as the reported premium.

Yet many big mergers don’t go smoothly. And the tax benefits may not be reliable, either. The U.S. Treasury is once again complaining about deals that reduce taxes in this way, known as inversions. At a minimum, the controversy could delay any transaction. A bigger danger is that lawmakers pursue broader change in the rules so as to help U.S. companies compete. That means Pfizer risks paying up for a fleeting benefit.


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