The largest takeover of the year could be about avoiding US taxes
If successful, the deal could be the largest this year. Allergan has a market value of about $113 billion.
It could also offer Pfizer something the US drugmaker has been after for a while - a way to move overseas and slash its tax bill.
That's called a tax inversion. It's a legal move, in which a US company merges with a foreign-domiciled company to shift its address to a lower-tax country - without moving its operations.
In this case it would have Pfizer moving its tax domicile - not necessarily its management headquarters - to Ireland, where Allergan is based.
Allergan and Pfizer said Wednesday only that they are in "preliminary friendly discussions." They noted that there's no certainty they'll reach a deal and declined to comment on potential terms. For a deal to become an inversion, it has to be structured in a specific way - mostly the acquirer has to pay for part of the deal with its stock.
Buyers in inversion typically take pains to explain that avoiding taxes isn't the only - or even the primary - rationale for a deal, but it's no secret that Pfizer has been looking for an inversion target. Pfizer CEO Ian Read has repeatedly said that tax is a competitive challenge for company in the US.
Here's what he said on the company's earnings call last week:
Bloomberg analysts Elizabeth Krutoholow and Curt Wanek explained what moving to Ireland would do for Pfizer:
Allergan's tax domicile is in Ireland, which provides one of the most attractive havens for tax-inverted deals, given the country's low corporate tax rate of 12.5%. This could double the amount of money saved on taxes, given Pfizer's current effective tax rate is 25%. This would allow Pfizer a better option for cash already held overseas instead of repatriation.
Tax inversions were common in the 1990s, but became a hot topic two years ago when a number of high-profile inversions, and attempts, took place.
They're particularly popular among drug companies. Actavis itself inverted to Ireland when it acquired Warner Chilcott in 2013. Valeant Pharmaceuticals acquired Biovail in 2010 to move to Canada, and
Pfizer eventually walked away from that deal, after AstraZeneca fended off the bid and UK politicians expressed disquiet over the potential acquisition.
Activity cooled off after the US Treasury introduced a regulation designed to make it harder to pull an inversion off in September 2014.
If the Allergan-Pfizer deal goes through and is structured as an inversion, it would become the largest such deal on record.