Why Trump's Executive Order Could Rekindle M&A Feelings for Allergan, Pfizer
April 24, 2017
By Mark Terry, BioSpace.com Breaking News Staff
On Friday, April 21, President Trump signed an executive order that will have the Department of Treasury review tax regulations issued in 2016 and 2017 that it views as overly complex and burdensome. During the ceremony, President Trump said, “We have taken unprecedented action to bring back our jobs and return power to our citizens. It’s been taken away. We’ve lifted one terrible regulation after another at a record clip, from the energy sector to the auto sector. And we have more to go. We’re here today to continue this great economic revival.”
Although what great economic revival he’s referring to is unknown, and the tax changes are far more likely to focus on corporate tax structure than individual taxes, it does seem likely that the Trump Administration and Secretary of Treasury Steve Mnuchin will repeal at least part of the Obama Administration’s rules affecting so-called “tax inversions.”
And if so, this could breathe new life into the now-dead merger between Pfizer and Dublin-based Allergan .
A tax inversion is where a U.S.-based company acquires a company located in a country—such as Ireland—which has a much lower corporate tax rate than the U.S. The U.S.-based company then shifts its domicile to the lower-taxed country to take advantage of the lower corporate rate.
Pfizer and Allergan were planning a merger that would do just that. Then, in April 2016, the U.S. Treasury Department released a new set of rules that makes it more difficult for U.S. companies to conduct tax inversions. The rules, which were over 300 pages in length, had two primary components. The first part took on “serial inverters,” which allowed the government to ignore U.S. assets acquired by these companies over the last three years.
The second component involved earnings stripping. The new rules stated, “Today’s action makes it more difficult for foreign-parented groups to quickly load up their U.S. subsidiaries with related-party debt following an inversion or foreign takeover, by treating as stock the instruments issued to a related corporation in a dividend or a limited class of economically similar transactions.”
The new rules were pointedly aimed at Pfizer and did what the Treasury Department apparently wanted them to do—kill the deal.
Now there is speculation that Trump’s Treasury Department will likely dismantle those new rules. As TheStreet writes, “The order could potentially open the door for pharmaceutical giants Allergan and Pfizer to take another whack at the $160 billion deal squashed by Obama regulations in 2016.”
“Maybe Pfizer would go back with Allergan,” said Bob Willens, a New York-based analyst and former Lehman Brothers managing director, to TheStreet. “I’m sure they still want to do the deal, and the only thing that’s prevented it is those regulations.”
Of course, it’s not clear if Secretary Mnuchin and President Trump will go after these regulations specifically—although the administration’s track record to-date has suggested if the Obama Administration enacted it, they want to repeal it, regardless of its benefit to the American people. Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, told TheStreet, “I think the ‘serial inverter’ regulations might be on the table. The serial inverter regulations ignored Allergan’s prior combinations with U.S. firms, to determine whether Allergan was a smaller foreign company being combined with a larger U.S. company, which would be bad, or was a larger or similar sized foreign company being combined with a U.S. company, which would be fine.”
The U.S. Chamber of Commerce filed a lawsuit in August regarding the Obama inversion rules, which are still in court. If Mnuchin and his staff go after the rules, that could preempt the court case.
One thing is likely—tax lawyers are going to be kept by. Steven Miller, former commissioner of the IRS and national director of tax at Alliantgroup, told TheStreet, “If I had a client who had been hit with an adverse position in financial regulations in 2016, I’d be putting my paper together to go on in. It could be a small cottage industry.”
Trump and Mnuchin may find this to be more difficult to accomplish than expected, however. Even though the Obama rules were considered by conservatives to be another example of Executive overreach, the reality is more complicated. Definitive changes to the U.S. tax code regarding tax inversions require an act of Congress. Democrats, in general, are opposed to the rollback of the Obama rules, but it’s not clear if the Republicans—despite paying lip service to it—are at all enthused about the idea of allowing large companies to leave the country with the primary goal of avoiding U.S. taxes.