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US Treasury norms clamp merger plan of Pfizer for Allergan

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(Credit: Simon Dawson/Bloomberg via Getty Images) A box of Lumigan eye-drops, produced by Allergan Plc, stands next to a box of Viagra tablets, produced by Pfizer Inc., on a pharmacy counter in this arranged photograph in London, U.K., on Monday, Dec. 14, 2015. European pharmaceuticals stocks in 2015 have outperformed the Stoxx 600 Index by 1.2 percentage points in U.S. dollar terms. Drugs From European Pharmaceuticals Companies As Stocks Outperformed The Stoxx 600 Index By 1.2 percentage Points
April 6
4:20 AM 2016

Pfizer Inc and Allergan Plc have decided to terminate their merger plan owing to the new measures announced by the US Treasury Department. Pfizer will abandon its $160-billion deal to buy Allergan due to the clamp on inversion deals by US companies. Apparently, the US Treasury is keen on malpractices by its local companies in tax evasion by merging with foreign firms.

The US Treasury Department on 4th of April 2016 came out with new norms curbing tax-evading transactions. The new Treasury norms aim at checking tax-driven corporate inversions by US companies via overseas tax havens. New York-based Pfizer was in the process of shifting its headquarters to Ireland after its announcement on buying deal in November 2015.  

Reuters reports that Pfizer may not change the terms on its $160-billion buying deal with Allergan. Under the new tax rules imposed by the US Treasury Department, Pfizer would no longer benefit from its move to Ireland. Despite the core operations and business being in the US, several corporate firms claim a new tax home.

In November 2015, Pfizer announced its plan to buy Botox-maker Allergan for $363.63 per share. Pfizer has been implementing cost cutting exercise. It is aiming for a $1 billion cost savings this year by changing its domicile. However, the US Treasury norms cracked down on the $160-billion merger plan as they clamped down the inversion deals. Pfizer and Allergan hold a view that the Treasury department overstepped the bounds of regulatory authority. 

CNBC further adds that Pfizer and Allergan will mutually terminate the merger in the wake of stringent norms imposed by the US Treasury Department. The changes in inversion rules have resulted in dropping the $160-billion buying deal. As a result, Pfizer will have to pay Allergan $400 million as break fee under the merger agreement.

The latest US Treasury norms prevent inversion deals which facilitate moving base to a country where it gets more favorable taxation environment to avoid paying taxes in the US. Several US companies have their base overseas, avoiding the massive tax payment to the US government. 

US Presidential candidates are also raising voice against the practice of tax evasion using overseas tax havens. Republican presidential candidate Donald Trump and democrats Hillary Clinton and Bernie Sanders have criticized inversion deals in their election campaigns. Meanwhile, Pfizer stocks closed up over two percent to $31.36 on news that it would terminate the merger deal and recommence negotiations on more favorable terms. 

However, investors of Allergan worried over the termination of the deal. As a result, Allergan shares tumbled 16 percent, wiping out $18 billion market capitalization. Pfizer and Allergan said they would review the new Treasury rules, but not speculate on any potential impact now, as reported by CNN Money.

The $160-billion merger deal from Pfizer to buy Allergan was expected to be the major deal in the US health sector. US President Barack Obama's statement on Tuesday further created pressure on the deal. While praising Treasury Department for new norms, Obama has also urged his Congress to take stringent measures to curb inversion deals of US companies. 

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