The largest takeover of the year is all about avoiding US taxes

Pfizer just struck the largest-ever takeover by a drugmaker, a $160 billion merger with Allergan.

In addition to best-selling cosmetic drug Botox, the deal gives Pfizer something it has been after for a while — a way to slash its tax bill.

It will do so with a so-called tax inversion, a move in which a US company merges with a foreign-domiciled company to shift its address to a country with a lower tax rate.

That motive explains the deal’s complexity.

The combination is being structured as a kind of joint venture, with the new business named Pfizer Plc (instead of Pfizer Inc.) but legally combined under Allergan Plc and taking on Allergan’s Irish domicile.

The result? Pfizer expects its tax rate to fall to 17%-18%, from about 25% now.

But the deal comes just as US regulators try to tighten the requirements around inversions in order to put an end to them. Just last week, the Treasury Department released new rules to help block such deals.

According to The Wall Street Journal’s Richard Rubin, the rules make it harder for companies to transfer foreign operations to new foreign parent companies. They also make it more difficult to buy foreign companies, and limit some of companies’ premerger maneuvers.

Pfizer says it’s in compliance. On a call with investors on Monday, Pfizer CEO Ian Read said the company “assessed the legal, regulatory, and political landscape,” before moving forward, and said it meets their read of the current law.

And although Read is something of an evangelist for tax reform — who has long promised that Pfizer would consider an inversion — he also pointed out that “we’re not doing this simply as a tax transaction,” noting that the company gets a way to grow in the US and overseas with the deal. Allergan’s Botox generates over $2 billion in annual sales.

For a deal to become an inversion, it has to be structured in a specific way. Primarily, the acquirer has to pay for part of the deal with its stock. Allergan shareholders will get 11.3 shares of the new combined company — valued at about $363.63 a share at the end of last week.

:Dan Kitwood/GettyPfizer CEO Ian Read.

Tax inversions were common in the 1990s but became a controversial topic in 2013-14, when numerous high-profile inversions — and attempts — took place. Last year, Treasury Secretary Jack Lew issued a number of measures to disincentivize inversions, including a provision that the shareholders of the US-based firm cannot own 60% or more of the new company.

It was enough to kill a massive $55 billion deal between pharmaceuticals AbbVie and Shire.

Inversions are particularly popular among drug companies. Actavis, which later acquired Allergan and kept the name, inverted to Ireland when it acquired Warner Chilcott in 2013. Valeant Pharmaceuticals acquired Biovail in 2010 to move to Canada.

Pfizer itself unsuccessfully tried to buy the British drugmaker AstraZeneca in May 2014, again, partly for the tax benefits of moving overseas. It eventually walked away from that deal, after AstraZeneca fended off the bid and UK politicians expressed worry over it.

Tax inversions aren’t limited to drugmakers, though; Burger King made headlines in 2014 when it merged with the Canadian food chain Tim Hortons and redomiciled there.

The Allergan-Pfizer deal is now set to be the largest tax inversion deal on record.





Nuria Pujol