Pfizer, Allergan fuse

On Monday, two huge pharma firms, US-based Pfizer and Ireland-based Allergan, said they will merge in a deal worth around $160 billion (150 billion euros). The merged company will likely be the biggest pharma group in the world as measured by revenues.

The transaction has been approved by the boards of both companies, and is expected to be completed during the second half of 2016. The formal headquarters of the combined company for legal purposes will be in low-tax Ireland, but the operational headquarters will be in New York.

The merger is the biggest announced this year, exceeding the enormous $121 billion merger of beer behemoths Anheuser-Busch InBev and SAB Miller unveiled in October.

"The proposed combination of Pfizer and Allergan will create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and therapies to more people around the world," Pfizer CEO Ian Read said in a statement.

His counterpart at Allergan, Brent Saunders, called the merger a "highly strategic, value-enhancing transaction."

The deal still has to be approved by shareholders and regulators. Once complete, the merged company, working under the name Pfizer PLC, will be listed on the New York stock exchange and trade under Pfizer's existing PFE ticker. These are clues that the deal might be considered more a takeover of Allergan by Pfizer than a merger of equals.

Pay taxes? Nah

A key reason - probably the main reason - for the merger: Avoiding taxes. Ireland is one of several small European countries that have set themselves up as tax havens by adopting taxation laws that are extremely advantageous for corporations. As a result, whilst Ireland has few major industries operating production facilities on the island, it has numerous corporate headquarters - at least in legal terms, even if the operational headquarters remain elsewhere.

Agence France Presse (AFP) reported that according to a source close to the deal, Pfizer wanted to get ahead of the upcoming implementation of new US Treasury regulations that will make it harder for US corporations to escape taxes through mergers with foreign companies. Such mergers involve moving US corporations' legal headquarters, for tax-domicile purposes, to a lower-tax jurisdiction.

This procedure is such a common practice in corporate America that it has its own technical term in corporate finance jargon. It's called a "tax inversion," and it's a dodge that has cost the US Treasury untold billions in revenues.

US-based Pfizer has accumulated a huge war-chest of retained earnings from profits in foreign jurisdictions - and it doesn't want to repatriate those to the US, where it would have to pay taxes on those earnings nominally set at 35 percent, albeit before tax accountants work through the country's myriad tax loopholes to reduce the effective tax rate. Ireland's corporate tax rates are much lower, at a nominal 12.5 percent.

"Pfizer will have greater financial flexibility..." said Pfizer chief Ian Read.

Synergies?

The companies also claimed they would be able to save about $2 billion in "operational synergies" over the first three years after the merger closes.

Often, corporate mergers involve one tribe of corporate chieftains pushing out the other - since in the merged company, two CEOs, CFOs, and so on, won't be necessary. But at least at the very top levels, the Pfizer-Allergan merger seems to have been negotiated such that both chieftains will retain a senior C-suite position. Ian Read will become chief executive of the new Pfizer PLC, whilst Brent Saunders will become chief operating officer, with oversight of the companies' combined commercial businesses, manufacturing and strategy.

Pfizer said it intended to continue with its existing dividend policy, and would also continue with its planned $5 billion share buyback in the first half of 2016.

Take your meds

The companies' combined medicine chest would include a number of top-selling meds, among them Pfizer's erection-prolonger Viagra (the blue pills pictured at top of page), cholesterol-reducer Lipitor, and nerve pain treatment Lyrica. Allergan would bring to the table Botox wrinkle treatment, Alzheimer drug Namenda, and anti-dry-eye med Restatis.

There's no word yet on whether the combined corporation's sales teams will be baffled by facing the admittedly hypothetical conundrum that promoting heavy use of Botox by ageing lady clients might conceivably undercut the need for plenty of Viagra amongst ageing Lotharios.

nz / uhe (AFP, DPA, Reuters)