Pfizer, Allergan scrap $160B deal after US tax rule change

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Pfizer, Allergan Go Separate Ways

April 6 (Reuters) - U.S. drugmaker Pfizer Inc and Ireland-based Allergan Plc walked away from their $160 billion merger on Wednesday, a major win for President Barack Obama, who has been pushing to curb deals in which companies move overseas to cut taxes.

Pfizer said the decision was driven by new U.S. Treasury rules aimed at such deals, called inversions. The merger would have allowed New York-based Pfizer to cut its tax bill by an estimated $1 billion annually by domiciling in Ireland, where tax rates are lower.

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While the new Treasury rules did not name Pfizer and Allergan, one of the provisions targeted a specific feature of their merger - Allergan's history as a major acquirer of other companies.

Allergan Chief Executive Brent Saunders said on CNBC television that the new Treasury rule would not stop the company from doing other stock-based acquisitions as soon as this fall. The new Treasury rule takes into account the past three years of a company's deals.

RELATED: More on the tabled merger

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Pfizer, Allergan scrap $160B deal after US tax rule change
Signage is displayed at the Pfizer Inc. Kendall Square Research and Development Center in Cambridge, Massachusetts, U.S., on Monday, Nov. 23, 2015. Pfizer Inc. and Allergan Plc agreed to combine in a record $160 billion deal, creating a drugmaking behemoth called Pfizer Plc with products from Viagra to Botox and a low-cost tax base. Photographer: Scott Eisen/Bloomberg via Getty Images
People walk past Pfizer World Headquarters, Monday, Nov. 23, 2015 in New York. Pfizer and Allergan will join in a $160 billion deal to create the world's largest drugmaker. (AP Photo/Mark Lennihan)
Signage is displayed at an Allergan Plc office in Medford, Massachusetts, U.S., on Monday, Nov. 23, 2015. Pfizer Inc. and Allergan Plc agreed to combine in a record $160 billion deal, creating a drugmaking behemoth called Pfizer Plc with products from Viagra to Botox and a low-cost tax base. Photographer: Scott Eisen/Bloomberg via Getty Images
Ian Read, chairman and chief executive officer of Pfizer Inc., left, and Brent Saunders, president and chief executive officer of Allergan Plc, stand for a photograph in front of Pfizer headquarters in New York, U.S., on Monday, Nov. 23, 2015. Pfizer Inc. and Allergan Plc agreed to combine in a record $160 billion deal, creating a drugmaking behemoth called Pfizer Plc with products from Viagra to Botox and a low-cost tax base. Photographer: Michael Nagle/Bloomberg via Getty Images
The Allergan logo appears above a trading post on the floor of the New York Stock Exchange, Monday, Nov. 23, 2015. Pfizer and Allergan are joining in the biggest buyout of the year, a $160 billion stock deal that will create the world's largest drugmaker. (AP Photo/Richard Drew)
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"It really looked like they did a very find job at constructing a temporary rule to stop this deal and obviously it was successful," Saunders said.

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Saunders said that he would stay to run the standalone company with a focus on both deals and research and development. Allergan will also move ahead with plans for its $40.5 billion sale of its generic drug business to Israel's Teva Pharmaceutical Industries. It expects the transaction to close by June.

With the deal behind it, Pfizer said it would decide this year about whether to split off its hundreds of generic medicines into a separate business. It had put off making that decision until 2019 after announcing its deal with Allergan last November.

Pfizer will pay Allergan $150 million to reimburse expenses from its deal.

Shares of Allergan, which fell 15 percent on Tuesday, were up 1.3 percent at $239.86 in early trading. Pfizer edged up 1.2 percent to $31.74.

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Pfizer has new products coming and plenty of money that it could put to work with acquisitions, though not on the scale of Allergan, said Les Funtleyder, healthcare portfolio manager at E Squared Asset Management in New York, which holds Pfizer shares. It is not clear that Pfizer should definitely split into two, he said.

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"It is true that these larger companies are a little unwieldy to manage," Funtleyder said, "but there are plenty of strategies to keep them together and increase shareholder value."

The decision to call off the deal came in part because Pfizer was concerned that any tweaks to salvage its deal with Allergan might have provoked new rules by the Treasury, a source familiar with the situation told Reuters on Tuesday.

Obama on Tuesday called global tax avoidance a "huge problem" and urged Congress to take action to stop U.S. companies from deals that allow it.

U.S. inversion rules have unraveled other mergers. U.S. drugmaker AbbVie Inc abandoned its $55 billion takeover of Ireland-domiciled peer Shire Plc in 2014 after the Obama administration cracked down on inversions. AbbVie had to pay Shire a $1.6 billion break-up fee.

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