Moves by the Obama administration to protect the US tax base torpedoed the massive $160 billion merger of drug giants Pfizer and Allergan Wednesday.
Pfizer said the deal announced last year, which would have seen it move its corporate domicile to Allergan's Ireland headquarters to slash its US tax bill, was cancelled due to new tax rules directly aimed at halting such "inversion" takeovers.
The companies said they were terminating the merger "by mutual agreement" just hours after President Barack Obama labelled such deals "insidious."
The decision to cancel the merger "was driven by the actions announced by the US Department of Treasury on April 4, 2016, which the companies concluded qualified as an 'Adverse Tax Law Change' under the merger agreement," Pfizer said in a statement.
The deal, in which Pfizer was to buy Allergan but then move its corporate administrative base into Allergan's Dublin headquarters to benefit from Ireland's ultra-low business tax rates, would have created the world's largest pharmaceutical company.
The move was expected after the Treasury announced on Monday tighter taxation rules aimed at closing off the benefits of inversions.
Allergan's shares plunged 14.8 percent on Tuesday as investors anticipated that the merger would be called off, while Pfizer moved up 2.1 percent. In early trade Wednesday, Allergan shares recovered 2.4 percent to $243.85 while Pfizer added 2.8 percent to $32.22.
Gaming the system
At least two dozen inversion mergers have been announced over the past four years, with Ireland the preferred destination for US companies relocating their legal domicile offshore. Other destinations have included England, Bermuda and Canada.
For example, in 2014 Miami-based Burger King's Brazilian owners 3G Capital merged the fast food giant with smaller Canadian coffee shop chain Tim Hortons in order to move the corporate address to Canada for tax savings. The main operations remained in Miami.
While US companies say the US corporate tax rate is uncompetitively high, the US Treasury has repeatedly warned that such deals are eating away at an important source of government revenues.
While not mentioning the Pfizer-Allergan inversion, the largest such deal announced yet, Obama on Tuesday called tax avoidance using legal loopholes "a big global problem."
He said wealthy individuals and corporations are "gaming the system" and are not "paying their fair share" while benefitting from the country's skilled workforce, infrastructure, and rule of law.
"They effectively renounce their citizenship. They declare that they're based somewhere else, thereby getting all the rewards of being an American company without fulfilling the responsibilities to pay their taxes the way everybody else is supposed to pay them," he said.
The Pfizer deal was particularly targeted by the new Treasury rules because Allergan itself had been built on previous inversion deals. In 2012 the US drugmaker Watson Pharmaceuticals took over Swiss company Actavis but took on Actavis' identity and offshore location.
In 2013 Actavis took over Ireland-based Warner Chilcott in an all-stock deal and moved its administrative headquarters to Dublin, where the corporate tax rate is 12.5 percent, compared to a maximum rate of 35 percent in the United States.
In 2014 Actavis took over US drug maker Forest Laboratories, reaping more tax benefits. And then last year Actavis merged with Allergan, the US maker of Botox, in a $66 billion deal that also cited huge tax savings.
Both Allergan and Pfizer expressed disappointment that their merger would not go ahead.
"Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies," said company chairman and CEO Ian Read.
Pfizer agreed to pay Allergan $150 million to reimburse its expenses linked to the planned merger.
Allergan CEO Brent Saunders said in a separate statement that while he is "disappointed" that the merger will not proceed, his company is nevertheless "poised to deliver strong, sustainable growth built on a set of powerful attributes."