Not for the first time has the ambitious and acquisitive pharmaceutical behemoth Pfizer (NYSE:PFE) has been upset at the merger altar, but, after what looks like its attempt to take over smaller Allergan (NYSE:AGN) is under threat, the company may well step back and assess how much shareholder value has been diverted into the strategy to get ever bigger.
The US Treasury dropped a bomb on the M&A arbitrage community last night, issuing an unexpected ruling on "corporate inversions" that could well doom the proposed merger between smaller Ireland-based Allergan and Pfizer. The action could also put an end to Pfizer's inversion ambitions.
The Treasury Department’s move follows a tirade of political criticism of the merger, which at $160bn would be the largest tax inversion deal in history.
The Allergan deal would have kept Pfizer in charge but take the Dublin headquarters of Allergan, allowing the combined company to cut its effective federal tax rate to about 17% percent, from Pfizer's current 25%.
Allergan is basically a New Jersey company formed by a series of mergers in recent years, and Pfizer would keep its top managers in New York. But by taking that foreign headquarters in a type of merger called a corporate inversion, it's able to avoid taxes on foreign earnings.
Between 2000 and 2009 Pfizer completed three giant mergers totaling $218bln, making itself the world's largest drug company. The biggest deal was Warner-Lambert for $93bln.
Some analysts believe Pfizer has destroyed tens of billions of dollars in value as it snapped up market share and killed off competitors, rather than knuckling down and inventing drugs. It has been a strategy that raised it to top titan among pharma companies.
That luck began to run out in 2014, when Pfizer's tie-up with the UK's AstraZeneca (LON:AZN) failed to happen. that year, Pfizer lost its crown as top pharma company to Swiss combine Novartis (VTX:NOVN), according to GlobalData's pharmaceutical revenue figures.
Quite apart from the fiscal benefits to Pfizer, a successful deal with Allergan would represent another step in the direction of reclaiming the top spot in the rankings of biggest pharma companies.
The deal isn't dead. But both companies are mulling their next steps in light of the tax changes - and in need of developing a cure quickly.
Pfizer shares ended up 2.1% at $31.36 while Allergan finished down 15.3% at $235.26 on Tuesday.