(Corrects spelling of Willkie in paragraph 18 from 'Wilkie')
By Olivia Oran and Soyoung Kim
NEW YORK May 1 Rumors about a massive
healthcare deal were circulating in industry circles, months
before Pfizer Inc disclosed its $100 billion pursuit of
Britain's AstraZeneca Plc , according to several
industry bankers and lawyers.
As rivals and bankers assessed what it could mean for
different companies in the industry, one aspect touched nearly
everyone: what it could mean for an increasingly popular U.S.
U.S. healthcare companies worried that if a household name
like Pfizer changed its domicile to Britain to lower its tax
rate as a result of a deal with AstraZeneca, it would spur
Congress into action and close the tax arbitrage opportunity,
called tax inversion, for everyone else, these people said.
The fear of such an outcome - even though it is likely many
months, if not years, away - added new urgency to companies such
as Botox-maker Allergan Inc and generic drugmaker Mylan
Inc that were already looking at European targets,
people familiar with these situations said.
Allergan declined to comment. Its CEO David Pyott has said
that he would be uncomfortable doing a deal where the tax
benefit, and not strategy, was the principal driver. Mylan could
not be immediately reached for comment.
Now that Pfizer's plans are out in the open, pitching by
bankers on inversion targets has reached a fever pitch. While
tax arbitrage deals have so far largely been in the
pharmaceutical sector, bankers and lawyers said U.S. technology,
consumer and industrial companies are also now looking into the
possibility of doing a tax inversion deal.
One banker, who declined to be identified because he is
actively advising companies on such deals, said the Pfizer plan
"will get people to try to move a lot quicker" so that they can
get a deal "grandfathered in" before any possible law change.
Tax inversions allow U.S. companies, which face one of the
highest tax rates in the world - a federal tax rate of 35
percent, and an overall rate that can be close to 40 percent
including state and local taxes - to move to a lower-tax country
by buying or creating a new holding company.
Since 2008, about two dozen U.S. companies have used the
strategy, versus about the same number over the previous 25
years, according to a Reuters review of transactions.
Ireland, the Netherlands, Switzerland, Canada and Britain
lately have been the most common destinations of U.S. companies
seeking new tax domiciles. The U.K. tax rate for companies is
due to drop to 20 percent from 21 percent next year. [ID:
This year, most of those deals have happened in healthcare,
which is in the midst of an unprecedented bout of deal-making.
More than $153 billion worth of deals have already been
announced so far this year in the sector, the highest since
Thomson Reuters began tracking data. Several more are in the
works, and many of those have tax arbitrage as one of the
crucial drivers for the transaction as well. [ID: nL3N0NL480]
As the industry had feared, Pfizer's plans have triggered
concerns in Washington, with lawmakers calling for comprehensive
tax reform. On Wednesday, a U.S. Treasury official said the
Obama administration is seeking ways to curb tax-dodging by U.S.
businesses that reincorporate overseas. [ID: nL2N0NM1RG]
"Inversion transactions illustrate the need for
comprehensive business tax reform that would lower corporate tax
rates and limit the ability of multinationals to shift income
outside the U.S.," the Treasury official said, noting that
the administration knows such deals "are occurring and aren't
being caught by the current rules."
Analysts and lawmakers say the chances of Congress passing a
new law anytime before the November mid-term U.S. elections are
slim given the gridlock between Democrats and Republicans over
the tax reform question. They expect Congress to take up tax
reform sometime next year.
"Without some kind of tax reform in this country, there are
huge benefits to large multinationals re-domiciling into more
tax-friendly jurisdictions," Ray McGuire, Citigroup Inc's
global head of corporate and investment banking, told an M&A
panel at the Milken Institute Global Conference in Los Angeles
earlier this week.
NOT ALL ARBITRAGE
While tax advantages have become a major driver for deals,
bankers and lawyers said their clients in general are thinking
of business needs first when assessing potential targets.
The frenzied dealmaking in healthcare comes as the industry
restructures amid healthcare spending cuts and competition from
"People may be pitching clients to do inversions now because
of a concern that the rules may change over time, but the
companies we deal with every day are thoughtful about these
things and do not just chase deals for tax purposes alone," said
Gordon Caplan, a partner at Willkie Farr & Gallagher LLP.
Buying AstraZeneca, for example, would boost Pfizer's
pipeline of cancer drugs and generate significant cost savings.
But it would also allow it to re-domicile to Britain and enjoy
lower tax rates. [ID: nL6N0NK194]
U.S. drugmaker Mylan, which has been seeking to buy Swedish
drugmaker Meda AB, was looking to do an inversion
deal because it was at a disadvantage compared to foreign
generic rivals, people close to the matter said. Major
competitors include Teva Pharmaceuticals Industries Ltd
, which is based in Israel, and Actavis Plc,
which re-domiciled to Ireland through a 2013 acquisition of
Warner Chilcott. Both face lower tax rates.
Mylan, these people said, is also worried that if it doesn't
complete an acquisition, it would be bought by another company
that has already completed an inversion.
Similarly, Allergan first approached Shire Plc in
recent months in part because of the tax arbitrage opportunity.
But now it, too, faces the prospect of being swallowed up by an
unwanted bidder, Valeant Pharmaceuticals International Inc
in partnership with activist investor Bill Ackman. That
has prompted Allergan to consider once again making a bid for
Shire, despite being rebuffed when it made a previous overture,
sources told Reuters earlier this week. [ID: nL2N0NK21P]
"There is a sense that the government will change the tax
rules, when and if they get around to rewriting the tax code as
they have talked about doing," said one M&A lawyer who is
working on these deals and therefore did not want to be
identified. "So if people want to do these deals they better do
(Additional reporting by Kevin Drawbaugh in Washington and Greg
Roumeliotis in Los Angeles; Editing by Paritosh Bansal, Martin