The U.S. pharmaceutical giant said it would acquire Allergan PLC (AGN) in a transaction worth about $160 billion in stock, cash, and debt. The deal would combine drugs and vaccines that treat everything from cancer to arthritis to pneumonia, and the wrinkle-fighting treatment Botox and erectile dysfunction product Viagra, under one roof — creating the world’s largest Big Pharma firm.
Most importantly: The U.S. corporate icon would assume Allergan’s headquarters in Dublin, Ireland — slashing its tax rate to around 17% to 18% from 25%. The so-called “inversion” transaction flies directly in the face of Treasury Department regulations designed to prevent such deals.
|The maker of Viagra plans to join the maker of Botox in what will challenge U.S. efforts to end “inversion” deals.|
In fact, Treasury just issued new and somewhat stricter guidelines last week. Treasury Secretary Jack Lew has spoken out against “tax-avoidance transactions,” while Pfizer CEO Ian Read has pushed back by slamming U.S. tax policy and elevated corporate tax rates.
So who will emerge victorious here? Investors believe Pfizer will succeed given the technical way in which the deal is organized. But that’s assuming Congress or the Treasury doesn’t get more aggressive with anti-inversion efforts.
If Pfizer can pull this off, it would be the largest pharmaceutical merger in history — eclipsing Pfizer’s own $116 billion purchase in 2000 of Warner-Lambert. The company is ultimately planning to split its operations into two business units, with one focused on selling generic drugs and one on newer, more expensive, patent-protected products. But that probably won’t happen until at least 2018, long after the expected 2016 closing date of the Allergan deal.
|“It would be the largest pharmaceutical merger in history.”|
As for the broader markets and the implications here, I’m watching the M&A business very closely. The ongoing rise in yields on higher-risk debt is driving the cost of deals up behind the scenes. If that trend continues, it will likely cool the ardor for mega-deals like this one … and that would be a market negative. So we’ll just have to see if Pfizer and its peers can keep pulling these kinds of transactions off.
So what do you think about this deal? Does Pfizer have a case when it comes to U.S. tax policy? Are corporate taxes too high here, and companies like Pfizer therefore justified in seeking out cheaper domiciles overseas? Or should the government put the kibosh on inversions before they drain the U.S. Treasury of needed tax revenue? You can add your take on this important debate below.
Will Mario Draghi and his counterparts elsewhere be able to keep asset prices inflated despite fundamental challenges? Are low gas prices actually stimulating the economy, or are rising costs elsewhere devouring those savings at the pump? Those are a couple of the questions you were trying to answer online recently.
Reader Palmer L. said: “Remember the old and correct saying: Do not ever fight the Fed. Our stock market is sooooo controlled by the Plunge Protection Team it is pitiful.
“How could our market go up the light of current world events? Well, the answer is: The Fed cannot allow for it to fail. Keep positive with owning U.S. stocks, it is a Gimmie.”
But Reader Richard countered that: “Delaying the inevitable never works. The money-printing machine is slowly going to run out of ink, Super Mario in Europe is on the ropes, and the level of stress on Europe is coming to a pinnacle.
“The levels in the stock market are manipulated and not a true reflection of value. The recent bull market is running out of steam as the manipulation ideas to keep pumping the value will eventually run out: Mergers, super-mergers, QE, share buybacks, easy credit on cars, job sharing, minus-zero interest rates, zero-hours work contracts, the list goes on and on.”
Reader Dai also added: “Draghi is faced with the same systemic problems as we have in the U.S. when it comes to stimulus. The banks are a bottleneck! His efforts will lead to the same skewed asset bubble we see here in the U.S.: Top end properties, top end equities, etc. There is no manner by which they can force banks to advance credit in any manner that will be truly meaningful to the overall economy.”
As for savings at fill up time, Reader $1,000 Gold said: “A year or two ago, I put $80/week in my gas tank. Now it’s barely $40/week. Times two cars, that’s $80/week I’m saving. Can you imagine how many fill-ups at the gas pump there are each day in this country and how much extra money that is going into OUR economy, instead of the Saudis?”
But Reader Deerflyguy said we shouldn’t get over-exuberant about cheaper gas. His take: “Money saved at the pump doesn’t equate to excess funds to bolster the economy. Has anybody done any grocery shopping lately?
“Smaller quantities in the food containers, at higher prices, don’t allow for much discretionary spending of your fuel savings. Whatever you might have saved at the pumps, in a month, is easily eaten up at one sit-down family Sunday dinner.”
Thanks for sharing these comments. And if you didn’t take advantage of the Money and Markets website to do so yet, make sure you add yours to the discussion below.
The pet supply retailer Petco Holdings will sell itself in a private transaction, rather than go public in an increasingly hostile IPO market. CVC Capital Partners and the Canada Pension Plan Investment Board are set to buy the company for around $4.5 billion from current owners, the private equity firms TPG and Leonard Green & Partners.
Belgian police and military conducted several raids and security operations in that country over the weekend and earlier today. Armed troops were deployed around the city of Brussels, while popular transportation services and shopping locations were all but shut down out of fear of more Paris-style attacks.
Saudi Arabia attempted a little verbal intervention to support oil prices this morning. But the pledge to work with non-OPEC and OPEC members to stabilize the market looks like just a repeat of what they’ve said before. No one has been able to pull together all the interested parties in the past year, so it’s doubtful they will be able to do so now.
More than $2 trillion of European government debt now yields less than zero, according to Bloomberg. That means investors are guaranteed to get less money back at maturity than they started with. Yet they’re buying anyway because they figure they can just sell to the European Central Bank after it cuts rates deeper into negative territory, or because they’re willing to pay a “safety premium” to own the stuff.
What do you think about buying an investment that’s guaranteed to lose you money? Or the latest effort by the Saudis to jawbone oil prices higher? Any thoughts on the ongoing terrorism threat in Europe? Let me hear about it online.
Until next time,
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