to invert or not to invert? the pfizer allergan...
TRANSCRIPT
TOINVERTORNOTTOINVERT?THEPFIZERALLERGANDEAL
Deathandtaxes..
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ThePfizerAllerganDeal:Background
¨ Pfizerhasbeensearchingforadealpartnerforawhile.ItsaKempttoacquireAstraZenecaendedlastyear,whentheUStaxlawoninversionswasSghtened.
¨ Inthelastfewweeks,though,PfizerhastargetedAllerganforanacquisiSonandthedealseemstobetakingform,combiningthesecondlargestpharmaceuScalcompanyintheworld(Pfizer)withthefiVhlargest(Allergan).
¨ Whiletherehasbeendesultorytalkaboutsynergy,thedealseemstobemoSvatedbytwofactors:¤ Buyinggrowth:Pfizerhasseenrevenuesdropoverthelastfiveyears
andisdesperateforgrowthandAllerganhashadhealthygrowthoverthethesameperiod.
¤ Taxsavings:AllerganisanIrishcompanyandthecombinedcompanywillhaveIrishroots,allowingPfizertoleaveitsUStaxjurisdicSon.
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TheGrowthMoSve
32.26%
-6.34%
-10.45%
-5.62%-3.84% -3.39%
27.71% 28.53% 29.02%
46.71%
50.53% 50.15%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
$-
$10,000.00
$20,000.00
$30,000.00
$40,000.00
$50,000.00
$60,000.00
$70,000.00
2010 2011 2012 2013 2014 LTM(2015)
AnnualRevenueGrowthRate
Revenues(inmilliions)
PfizerversusAllergan:DivergingGrowthPaths- 2010to2015
PfizerRevenues AllerganRevenues PfizerRevenueGrowth AllerganRevenueGrowth
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Atwhatcost?
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TheTaxMoSve
¨ PfizerhasbeensurprisinglyopenaboutitstaxmoSves,withCEOIanReadarguingthattheUStaxcodeputsPfizeratataxdisadvantageglobally.
¨ EvenifitwerenotvocalaboutthetaxmoSve,itsacSonsoverthelastcoupleofyears,whereithastargetedanumberofotherdrugcompaniesfordeals,withtheonlycommonthreadbeingthattheirwereallifforeignlocales,suggeststhattaxesarefrontandcenterinthisdealaswell.
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TheUSTaxCode’sTrifecta
¨ HighMarginalTaxrate:TheUSnowhasthehighestmarginalcorporatetaxrateintheworldat40%.
¨ Globaltaxmodel:TheUSisoneofsixcountriesintheworldthattaxesitscorporaSonsontheirglobalincomeattheUStaxrate.
¨ TheRepatriaSonTrigger:TheforeignincomeisnottaxedatthedifferenSalrate(betweentheUSandtheforeigndomicile)unSltheincomeisrepatriated.
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ThePayofftoInverSng
¨ ForeignincomeisnottaxedatthedifferenSalrate:OnceacompanymovesfromaUStaxdomiciletoanon-USone,foreignincomegetstaxedattheforeigntaxrate,butthereisnodifferenSaltax.
¨ Trappedcashisimmediatelyuntrapped:Theaccumulatedcashinforeignmarketsisuntrappedandcanbeusedforanypurpose.
ImplicaSon:Companiesthatareprofitableandhaveasignificantpropor5onoftheirrevenuesfromnon-USmarketswillgainthemostfrominversions.
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ThePfizerCase
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ThreeTaxScenariosforPfizer
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Andthevalueundereachone..
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AgooddealforPfizerstockholders?
¨ ThevaluecreatedbyinverSngis$27.15billion,butitreflectstheassumpSonthatUStaxcodewillnotchange.IfyouassumethatthepoliSciansonbothsidesoftheaislemeanwhattheysayandthatthetaxlawwillchange(lowertaxrate,removeglobaltaxfeature),thevaluecreatedbyinverSngwilldecline.
¨ Therearetwocoststoconsider:¤ Thechangeintaxlawslastyear,designedtomakeinversionsmoreinfrequent,will
addtothecostofthisdeal.¤ Theremaybeabacklash,wherePfizer’sproductsmayberestrictedintheUS
markets.¨ Evenifthesecostsareminimal,thedealwillcreatevalueonlyifthe
premiumthatPfizerpaysforAllerganislessthanthevalueaddedfromshiVingtaxstatusandalloftheotherbenefits(synergy,growthetc.).Attherumored30%premium(about$30billion+),thisisabaddeal.Allerganisthewrongtarget,atthewrongpriceandatthewrongSme.
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AMoralorEconomicArgument?
¨ IfthevaluecreatedbyinverSngyourbusinessexceedsthecost,andyoufeelopposedformoralorpatrioScreasons,youarefacedwithachoice.¤ Ifyouownthebusiness,youarewellwithinyourrightstostayaUScompanyand
paytheUStaxrate.ItsyourbusinessandyoucanbeaspatrioScandmoralasyouwanttobe.
¤ Ifyouarethemanagementofapubliclytradedcompany,youhaveafiduciaryresponsibilitytoyourstockholderstomaximizevalue.RememberthatmanyofyourshareholdersarenotUSciSzensanditisnotclearthattheyshareyourpatrioSczeal,andthatquiteafewofthemwilldisagreewithyourargumentsthat“maximizingtaxespaidtothegovernment”ismorallyright.
¨ TheboKomlineisthatataxcodethatconstantlytestsindividualsandcompaniesontheirpatrioSsmandmoralitywillfailanddeliverwhattheUStaxcodedoes:asystemthatisinefficientatcollecSngtaxesandthatencouragescompaniestotakeperverse(andcostly)acSonsintheirpursuitoflowertaxes.