If a corporate merger is a marriage, then there needs to be someone to officiate, to make sure everything’s all legal and above board. In the case of the recently announced nuptials between pharma giants Pfizer and Allergan, the ‘vicar’ will in fact be the ‘vampire squid’ itself, Goldman Sachs, leading a team of five other investment banks. The combined fee for the service? A cool $350m (£232m) according to Thomson Reuters and Freeman Consultanting. No one ever said weddings were cheap.
The tie up between the two firms is set to be the second biggest in corporate history, after Vodafone’s takeover of Mannesmann at the height of the dot com boom. It’s perhaps no surprise that such an operation would be tricky (read: expensive) to execute, but this is astronomical, representing approximately 1% of the combined market cap of the two companies. And that’s not even including the cost of the nine law firms involved.
The reason it’s so steep is that this is a deal that US lawmakers have worked rather hard to make sure shouldn’t happen: a tax inversion that will save Pfizer a fortune and, in the words of Hilary Clinton, leave the US taxpayer ‘holding the bag’. Getting round the obstacle course of regulations requires devilish ingenuity and cold, hard cash.
Under the terms of the deal, the smaller Allergan, which is based in low-tax Ireland (see how inward investment is revitalising the Celtic Tiger here), will in fact buy the larger Pfizer, which is based in higher tax America. To do this, it needs financing, which is something Goldman Sachs et al know a thing or two about.
Despite the huge costs involved, it’s clearly worth it for both Pfizer and Allergan. The American firm could see its overall effective tax rate fall from 25% to around 15% once it moves into Allergan’s Dublin bachelor pad, and beyond that expects to save $2bn in costs over three years due to ‘synergies’. Allergan shareholders, on the other hand, are getting a 30% premium on the value of their stock before rumours of the takeover broke. It’s win-win (unless you’re the US Treasury Department).
The only downside to Pfizer is the threat to its reputation. The pharmaceutical industry isn’t exactly universally popular as it is (see the case of Turing’s price gouging for an idea as to why). Going hand in tentacle with the vampire squid on a colossal tax inversion scheme is unlikely to go down well with the general public, even though it will of course have zero effect on their willingness to buy life-saving medicines.
Maybe that negativity found its way into investor confidence. Shares in Pfizer fell 2.7% in New York yesterday, while those in Allergan fell 3.4%.