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 Department issued new rules limiting the tax benefits of such deals. Treasury said the rules were not designed to target any one deal, but it’s pretty clear they were crafted with Pfizer in mind. Under previous rules, an inversion in which a smaller foreign company, Allergan (AGN), acquires a bigger U.S. company, Pfizer (PFE), would only be allowed to take full advantage of its foreign tax domicile if the smaller company is at least 40% 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 (VRX)—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.