Pfizer says AstraZeneca is a good strategic fit for its portfolio but also considers it good cash management. With US corporate tax reform pretty much off the table for 2014 many companies are looking for ways to get ahead of that reform and perhaps deploy their growing overseas cash piles. It certainly beats bringing it home to be taxed at 35 percent or waiting around for the US government to figure out how to tax it. In doing so, Pfizer, like many companies recently, is considering an “inversion transaction” to save on taxes. In these deals, a US company buys a smaller foreign company then redomiciles in the takeover company’s (lower-tax) country or another popular, tax-friendly destination like Ireland.
Pfizer on the weekend renewed its bid for the British pharma, offering $100bn; so far AstraZeneca still has declined to engage with Pfizer. The company’s bid on a foreign company follows on GE’s recent offer for France’s Alstom, which would also be financed with GE’s overseas cash. Pfizer said in a statement that “synergies would be achieved through the combination of the two companies’ operations and that the combination would enable greater capital efficiency and a more efficient tax structure.”
In making its most recent bid (the company made a previous offer in January), Pfizer is also addressing another larger tax question: is it worth it to stay in the US with its high corporate tax rate and uncertain reform? In its statement, Pfizer said that if the deal goes through the two companies would combine “under a new UK-incorporated holding company. As a global corporation, Pfizer would expect the combined company to have management in both the United States and the United Kingdom, and to maintain head offices in New York and list its shares on the New York Stock Exchange.” As a UK-incorporated holding company, the new entity “would not subject AstraZeneca’s non-US profits to US tax, which would be in the best interests of the combined company’s shareholders,” the statement said.
Pfizer would join a growing list of companies going after conversion transaction opportunities. Such deals can save a company millions of dollars a year in taxes. It’s also something included on the list of corporate tax maneuvers the latest Obama budget wants to eliminate. “This opens up a whole array of additional tax planning opportunities because now the combined company can develop business that is not under a US company,” says a corporate tax attorney familiar with such transactions. “Any such earnings will be outside the US tax net and therefore are subject to a lower effective rate of tax. This corporate inversion strategy has been used by a number of pharma companies.”
But other sectors are looking at inversions as well. Chiquita Brands, after buying Europe’s Fyffes, currently is in the process of moving to Ireland. And US pharmacy chain Walgreens recently has been urged by a large group of shareholders to move to Europe on the back of its takeover bid of Swiss-based Alliance Boots. Europe holds many inducements and Pfizer acknowledges as much about the UK. Pfizer’s statement suggests that manufacturing is easier in the UK than the US. “…[T]he United Kingdom has created attractive incentives for companies to manufacture products and maintain and protect intellectual property, and we have seen that capital and jobs have followed these types of incentives.”
Pfizer’s acquisition and use of its possible overseas cash might also help it stave off activists, who have been vocal in the last couple of years about corporations’ growing cash piles. It might also help it stave off the accusations of a not using its cash in the best way possible, which Apple has recently encountered. Many feel the company is just trying to boost its share price by buying back stock because it lacks innovation or imagination when it comes to M&A. “Is a share buyback the best Apple could do with $14 billion?” one recent wondered.
The other aspect that makes the non-US pharma attractive is that AstraZeneca is already earning its money outside the US, which means that it is easier to restructure so that the earnings are subject to a low effective rate of tax. If Pfizer were acquiring US target it would be subject to substantial limitations on its ability to move profits offshore.
If in fact Pfizer is looking to re-domicile in the UK, it might prompt the US to get back to the negotiating table in coming up with meaningful tax reform. According to news reports, Republican Representative David Camp, chairman of the House Ways and Means Committee, said it “is a real problem when the tax code provides an incentive for US-based companies to move overseas, often times taking good jobs with them.”