Financial Analysis of Corporate Deals

A Project on

Tax Implications on the Allergan – Pfizer Deal

Submitted to Prof. Ashutosh Dash

Submitted By:
18P030 – Naveen Daga
18P032 – Nimisha Rustagi
18P125 – Aman Jain
18P188 – Arihant Jain
18P206 – Naman Jain
 The Pfizer- Allergan Deal
About Allergan

Headquartered in Dublin, it is a leader in new industry model as it is focused on developing,

manufacturing and commercializing innovative branded pharmaceuticals, high-quality
generic and over-the-counter medicines and biological products for treatments of central
nervous system, eye care, medical aesthetics, gastroenterology, women’s health, urology,
cardiovascular and anti-infected therapeutic categories. The company had an
unconventional rise, starting as a company called Watson Pharmaceuticals. In 2012, Watson
acquired Actavis Group and later it bought Warner Chilcott and Forest Laboratories. It later
bought Allergan, taking the company’s name. At present, Allergan operates the world’s
third-largest global generics business, providing patients around the globe with access to
affordable high-quality medicines. It has commercial operations in over 100 countries.

About Pfizer

A leading global pharmaceutical company for over 150 years, its product portfolio includes
medicines and vaccines as well as many consumer health care products. Pfizer is organized
into nine principal operating divisions: Primary Care, Specialty Care, Oncology, Emerging
Markets, Established Products, Consumer Healthcare, Nutrition, Animal Health, and
Capsugel. From the miracle of penicillin to Pfizer RxPathways, which helps people without
prescription coverage maintains access to important medications, the company meets the
diverse health needs of people.

The Pfizer – Allergan Deal Matrix

 The deal was done in a stock transaction valued at $363.63 per Allergan share, for a
total enterprise value of $160 billion, based on the closing price of Pfizer common
stock of $32.18 on November 20, 2015. 
 The transaction represents more than a 30% premium based on Pfizer’s and
Allergan’s unaffected share prices as of October 28, 2015.
 Allergan shareholders will receive 11.3 shares of the combined company for each of
their Allergan shares, and Pfizer stockholders will receive one share of the combined
company for each of their Pfizer shares.
 The companies expect that shares of the combined company will be listed on the
New York Stock Exchange and trade under the PEE ticker.
 The completion of the transaction is subject to certain conditions, including receipt
of regulatory approval in the US and the European Union, the receipt of necessary
approvals from both Pfizer and Allergan shareholders, and the completion of
Allergan’s pending divestiture of its generics business to TevaPharmeceuticals Ltd,
which Allergan expects will close in the first quarter of 2016.
 According to the terms and conditions of the merger, the Allergan parent company
will be the parent company of the combined group.
  A wholly-owned subsidiary of Allergan will be merged with and into Pfizer, and
subject to receipt of shareholder approval, the Allergan parent company will be
renamed Pfizer plc after the closing of the transaction. Allergan shareholders will
own around 44% of the combined company.
 Immediately prior to the merger, Allergan will effect an 11.3-for-one share split so
that each Allergan shareholder will receive 11.3 shares of the combined company for
each of their allergen shares, and the Pfizer stockholders will receive one share of
the combined company foe each of their Pfizer shares. 

Advantage of the Deal

 The transaction is about two great companies coming together to create a highly
competitive biopharmaceutical leader with two best-in-class businesses.
 The acquisition will bolster Pfizer’s scale, diversity, and research pipeline, and reduce
its exposure to patent cliff.
 Together it will be even better positioned to make more medicines and more
therapies available to people around the world.
 The deal enhances offerings from both Pfizer’s faster-growing branded products
business with additions like Botox and Allergan’s established products. The
combination will provide access to about 70 additional worldwide markets for
Allergan’s products.
Particulars Pfizer Allergan

Revenue in 2015(E) $48 BILLION $16 BILLION

30,000 US colleagues 10,000 US colleagues

Global capabilities
65,000 ex-US colleagues 5,000 ex-US colleagues

Tax Inversions

Tax inversions are transactions through which companies relocate their legal domicile to
low-tax countries, generally by merging with smaller companies based in a lower-tax
jurisdictions, “in order to minimize U.S. tax on U.S. and non-U.S. income.

Two primary benefits provided by inversions were:

(1) the removal of a company’s foreign operations and income from the U.S. taxing
jurisdiction to achieve pure “territorial” tax treatment (in which income was taxed only in
the country where it was earned); and

(2) the reduction of U.S. taxes on income from U.S. operations through the use of various
“earnings stripping strategies” (e.g., making payments of deductible interest or royalties
from the U.S. entity to a new foreign parent)

How Tax Inversion Works ?

  One key motivation for tax inversions is that the United States, unlike other
developed countries, attempts to tax US-based corporations on all their profits
regardless of where in the world the profits were earned
 Companies get to deduct the corporate income tax they pay to foreign governments
for their foreign profits, but since the US has a higher corporate income tax rate than
most foreign countries, that generally leaves a residual tax bill
 So if a US-based company can become a subsidiary of a company headquartered in a
low-tax jurisdiction like Ireland, then it can avoid paying a bunch of taxes on sales
made in foreign countries.

Origins of Anti Inversion Rules ?

• In 1980s, “Mailbox inversions” started which means companies in US merged with

shell corporations formed in the tax haven of Bermuda
• To avoid this, Congress passed Section 7874 in 2004, the first anti-inversion rule, a
regulation designed to prevent domestic companies from transacting , generally
through merger or acquisition, with foreign companies for the purposes of adopting
an address in a lower tax jurisdiction

Section 7874

Section 7874 permits tax benefits to be extended to inversions in which less than 60 percent
of stock is retained by a domestic company’s shareholders, condemns an inversion when 80
percent of stock is retained by the domestic company’s shareholders, and affords some
benefit to inversions with expatriated entities in the gray area between.

The Skinny Down Rule

 In 2014 & 2015, the IRS and Treasury responded to the rise in serial inversion by
releasing a notice that laid the foundation for the Temporary rule
 The Skinny Down Rule: It prevents a domestic company from reducing its market
capitalisation prior to an inversion.
 Domestic companies would “skinny-down” in order to reduce the relative fraction of
ownership allocated to domestic shareholders considered in the ratio calculated
pursuant to Section 7874

The Temporary Rule

• In 2016, The IRS and the Treasury instated the temporary rule, a regulation requiring
three years of company stock growth to be disregarded when calculating stock
ownership under the categorical determinations of Section 7874
• The Temporary Rule thus instated a look-back policy that does not allow for stock
accumulated through a foreign company’s U.S. deals over the past three years to
count towards the market capitalization required to meet the inversion percentage
thresholds, even if the deals were unrelated to each other
 • This exclusion of accumulated stock from the ownership denominator would slow
the ability of a foreign company to inflate the relative fraction of ownership allocated
to the foreign company’s shareholders through successive acquisitions of domestic
companies

Impact on Deal

• Pfizer shareholders would have owned 56% of a combined Pfizer-Allergan company

—but that percentage would have surpassed the 60% benchmark if Washington
were to disallow Allergan’s previous inversion deals.
• Allergan was affected and perhaps targeted by the Temporary Rule due to its past
mergers, which include a $66 billion merger with Actavis, PLC, a $25 billion purchase
of Forest Laboratories, and a $5 billion takeover of Warner Chilcott
• This behavior makes Allergan a “serial inverter” and causes Pfizer to be treated as an
“expatriated entity” under the former terms of the merger agreement
• The deal would have dropped Pfizer’s tax rate from 25 percent to 17–18 percent,
saving the corporation $1 billion annually. Instead, Pfizer was required to pay
Allergan $400 million in termination fees.