Pfizer has bowed to the inevitable and terminated its $160 billion merger with Allergan, which would have moved the company’s legal domicile to Ireland. The dissolution is expected to be announced this morning.
The move comes after the Treasury issued new rules limiting the tax benefits of such deals. Treasury said the rules were not designed to target any one deal, but it is pretty clear they were crafted with Pfizer in mind. Under previous rules, an inversion in which a smaller foreign company – Allergan – acquires a bigger U.S. company – Pfizer – would only be allowed if the smaller company is at least forty percent of the new company. Allergan met that threshold. But under new rules, any assets acquired in the past three years don’t count in making the calculation, causing Allergan to fall below the threshold.
Is this regulatory overreach by the Obama administration? Probably. Is it a ham-handed way of dealing with the controversy? Certainly. Is the real problem a U.S. corporate tax system in desperate need of reform? Most definitely.
But the Pfizer board should have seen this coming.
When the deal was announced last November, I wrote in CEO Daily that this “won’t end well, for the company or the country.” While the deal is now over, the ramifications aren’t. The populist rage stoked by the actions of companies like Pfizer – or its price-gouging cousin, Valeant – are roiling this year’s Presidential politics. Their effects will be felt for some time to come.
The lesson is clear. Big public companies need the goodwill of the public to survive and thrive. Companies that forget that pay a price – and exact a heavy toll on others.
More news below.
• Cruz and Sanders Carry Wisconsin
Big wins in the Badger State for Ted Cruz and Bernie Sanders have kept the race for both the Republican and Democratic nominations alive, at least for another couple of weeks. Cruz called his 15-point win over Donald Trump 'a turning point', while Sanders triumphed over Hillary Clinton by an equally impressive 13-point margin. The New York primaries on April 19 now look likely to be decisive for all concerned. Fortune
• DoJ Takes Aim at Halliburton/Baker Hughes
While the Treasury has torpedoed Pfizer/Allergan, the Justice Department is pushing the $35 billion deal between Halliburton and Baker Hughes closer to collapse, on long-standing antitrust concerns, according to The Wall Street Journal. The DoJ is expected to file suit "at any time" to block the merger, it says. Oil producers will be relieved that, with crude prices set to stay lower for longer, they will be facing a services sector less able to defend its own margins at their expense. WSJ, subscription required
• Maps, Geeks & Automobiles
Amazon.com and Microsoft are in talks to buy a stake in the HERE mapping service that an alliance of Germany's premium carmakers bought off Nokia last year, Daimler's head of R&D told The Wall Street Journal. Daimler, Audi and BMW need Silicon Valley's help to build connected and self-driving cars, and specifically need a Cloud provider to handle the data that HERE's users will generate. But they've been leery of giving too much away to companies such as Google and Apple, who have their own plans for connected cars. WSJ, subscription required
• H&M Profit Falls on Currency Effects
The great 2015 dollar rally continues to pass through corporate balance sheets like a pig passing through a python. Swedish fast-fashion group Hennes & Mauritz's earnings before interest and tax fell 29% in the three months to March, as the boost from a favorable base effect last year disappeared out of its calculations. Adjusted for currency effects, sales rose only 2% on the year, which will have the macroeconomic doomsayers pursing their lips and nodding gravely.
Around the Water Cooler
• Investors Follow Air France CEO in Throwing in the Towel
Shares in Air France-KLM opened down over 7% after CEO Alexandre de Juniac decided that there were better ways to spend his limited days on earth than trying to persuade French pilots to give up their gold-plated contracts. The Franco-Dutch carrier, like Germany's Lufthansa, has been unable to stop discounters like Ryanair and EasyJet eating its lunch on key short-haul routes in Europe. De Juniac is off to head the airlines' trade association IATA, where the risk of having the shirt ripped off his back by striking employees (as happened to one of his colleagues last year) is reassuringly small. Reuters
• Springtime for Parents
A sign of enlightenment, or of a tight labor market that's strengthening the hand of employees? San Francisco became the first U.S. city to mandate six weeks of fully paid parental leave, requiring employers to shoulder much of the cost and exceeding federal and state benefit rules for private-sector employees. The law grants six-week leave for fathers and mothers working for companies with 20 or more employees, nearly doubling the pay they are now eligible to collect under California law. Fortune
• Another Weight Off Ivan Glasenberg's Mind
The commodity sector's crash diet continues, with Glencore agreeing to sell a 40% stake in its agricultural business to the Canada Pension Plan Investment Board. The global bellwether for the business of getting stuff out of the ground gets to reduce its debt pile by another $2.5 billion, but the stock market is unimpressed, as the implied valuation is at the bottom end of (already sober) market estimates. Fortune
• Osama Bin Laden, Gold Bug
The world's public enemy number 1 was just another retail investor sucked into the late stages of a bull market. According to newly-declassified materials, the Al Qaeda leader was urging his followers to invest some ill-gotten ransom money in gold at the end of 2010, predicting the price would rise to $3,000 an ounce. It peaked at less than $1,900 within months. Bin Laden may have thought, like Warren Buffett, that keeping one's distance from Wall Street aids investment decisions. But Abbottabad seems to have been taken the principle too far. We guess he'd say that he was just 'right too early.' NYT