Will the Pfizer Inversion Get It Booted From the Dow?

American Pharmaceutical Company Pfizer Propose To Takeover British AstraZeneca
LEATHERHEAD, ENGLAND - MAY 07: The sign for the UK commercial headquarters of pharmaceutical firm Pfizer at Walton Oaks, which has over 900 employees on the 320-acre site, on May 7, 2014 near Leatherhead, England. The proposed takeover by American pharmaceutical giant Pfizer of its British rival AstraZeneca has led to the UK Business Secretary Vince Cable addressing Parliament to affirm the government's commitment to securing British science jobs. (Photo by Oli Scarff/Getty Images)
Photograph by Oli Scarff — Getty Images

Pharmaceutical companies Pfizer and Allergan (AGN) confirmed Monday that they have agreed to merge in an inversion deal that will reincorporate the combined firm in Dublin, Ireland, helping the company lower its effective tax rate from 25% to between 17% to 18%. Some experts think Pfizer’s eventual tax rate could be significantly lower.

But lower taxes aren’t the only consequence of moving headquarters out of the United States. Being located in America has long been a criterion for inclusion in indices like the S&P 500, the Dow Jones Industrial Average, and Fortune’s own Fortune 500. Here’s how Pfizer’s move will affect its places on these American institutions.

S&P 500: The S&P 500 is the list Pfizer (PFE) executives would likely be most afraid of leaving. Because this list is relied on by index investors who want to get cheap exposure to the broad stock market, losing a spot in the S&P 500 could mean fewer potential buyers of Pfizer stock. As Fortune explained in its 2014 exposé on corporate inversions, S&P used to require that a company be domiciled in the U.S. in order to be included in the index:

In 2008 and 2009, S&P . . . tossed nine companies off the 500 for inverting. But four years ago, S&P changed course, for business reasons. Companies were angry at being excluded, and index investors wanted to own some of the excluded companies. Moreover, S&P feared that a competitor would set up a more inclusive, rival index.

So in June 2010, S&P changed its definition of American. Now all it takes to be in the S&P 500 is to trade on a U.S. market, be considered a U.S. filer by the Securities and Exchange Commission, and have a plurality of business and/or assets in the U.S.

Because the new Pfizer isn’t moving assets abroad as part of the deal, and the majority of the company’s revenue will come from the U.S., it should be able to keep it’s place on the S&P 500.

Dow Jones Industrial Average: The merger will likely get Pfizer tossed from the Dow. Last year, the committee charged with overseeing the Dow Jones Industrial Average changed the language to stress that companies must be domiciled in the United States to do be included among the 30 companies that comprise this famous index. “Considering this is one of the oldest indices, and always considered to be a purely U.S. index, we wanted to maintain that legacy,” David Carlson, director of U.S. and Canadian equity indexes at S&P Dow Jones Indices, told the Wall Street Journal last year.

A spokesperson from S&P Dow Jones Indices declined to comment.

Fortune 500: Here, Pfizer is also out of luck. Fortune requires that members of the Fortune 500 list be domiciled in the United States. So if the Pfizer deal goes through, Fortune can confirm that the drug company will be off our list, just as Medtronic and others were before it. It will be eligible, however, for inclusion on the Fortune Global 500.




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