Appendix 6 - Record breaking year for Mergers and Acquisitions

There is a strong chance that at some point in the past year you have heard about a merger or acquisition. In fact, it has been hard to avoid them in the news this year with a total value of $4.2tn in transactions in 2015 alone. What is interesting, or possible concerning depending on your view point, is that this figure beats the previous record which was set in 2007 on the eve of the financial crisis.

So why have mergers and acquisitions (M&A’s) become so popular? Well quite simply, there are several advantages that a company can benefit from. From operational efficiency’s to increased market power, entry to new markets and industries as well as tax benefits (something which I will look at closely later).

One particular merger which caught my eye for a few different reasons was the recent announcement that US pharmaceutical company, Pfizer, have agreed a $160bn deal to takeover Irish based Allergan. Having read many articles on this deal, including this one on the FT, the thinking behind this seems clear. In moving the company to Ireland, Frank D’Amelio, Pfizer’s CFO said that the company’s effective tax rate would fall from the 25.5% it was in 2014, to somewhere around 17-18%. As a result of this, Pfizer will be able to save around $21bn (yes, $21bn!) on their future tax bills.

Having been offered a role working for Pfizer and visiting their UK head office in Surrey a couple of years ago, I learnt a lot about the company and ever since then I have kept an eye on how they have been doing, so as you can imagine I was intrigued by this announcement. From the company’s perspective, the tax savings would be hugely beneficial and as CEO Ian Read stated, it would allow the newly formed company to increase investment on research to discover new drugs, which in the future could be potentially be lifesaving. In an industry such as pharmaceuticals, where the main objective is to produce drugs which can help deal with illnesses, surely all companies should be encouraged to reduce their costs which could then enable them to develop new medicines.

So this can only be a good thing yes? Well, don’t be fooled by this because the company themselves have announced that they are going cut $660,000 from their R&D budget in order to save costs. So despite stating they could potentially invest the tax savings in developing new drugs, they are planning to go the other way and reduce investment in R&D. This brings me on to negative aspects of M&A’s, with many US politicians stating their opposition to allowing this deal to go ahead. Hilary Clinton voiced her concerns by saying ‘This proposed merger, and so-called ‘inversions’ by other companies, will leave US taxpayers holding the bag’. I agree totally with this because in the allowing a multi-national company, such a Pfizer, to re-locate to another country will have a huge impact on tax revenues received by the US government, which will have to be replaced from other avenues.

In order to try and get around this problem, the two companies have stated the deal will be a reverse merger, where Allergan will takeover Pfizer, but rename themselves Pfizer and continue to operate on the NYSE as PFE. So basically, what they are suggesting is that on paper it will say Allergan have taken over Pfizer but in reality it is the other way round, sneaky.

Although people will have differing views on this deal, I can’t blame Pfizer for wanting to do this. If you can potentially save $21bn in taxes from relocating why wouldn’t you? If this deal goes ahead and becomes a success, I can see more and more US companies going down the same route and I for one cannot blame them.