Tax for the CFO: Should Pfizer Acquire Allergan?

On November 20, 2015, the chief financial officer of Pfizer Inc. (Pfizer) was preparing to make a recommendation about whether to proceed with or stop merger talks between Pfizer and Allergan plc (Allergan), a pharmaceutical company with headquarters in New Jersey but tax residence in Ireland. Informal talks had been going on for almost a month, but both sides were rapidly approaching the pre-arranged deadline. The two teams had less than a week to either formally agree to proceed with a merger or walk away. Formalizing the agreement meant activating a US$400 million breakup clause that would make it costlier to call the deal off at a later date. Allergan’s Irish tax residency made this merger both attractive and concerning. While it provided the opportunity to lower Pfizer’s worldwide tax rate, the U.S. Treasury Department had recently announced regulatory changes targeting mergers that relocated a company’s tax residence to a low-tax country (called “tax inversions”). Pfizer’s legal team members were confident that the announced changes would not affect the proposed merger with Allergan. However, they were less certain about if—and when—the U.S. Treasury Department might make changes again.

This case is designed to introduce tax terminology and concepts in a finance or financial accounting course. It can be used with either upper-level undergraduate students or generalist graduate (MBA) students. The case requires the use of time value of money concepts, needed to value future tax savings. The case can also be adapted to supplement tax inversion content in a specialized tax class, although the case does not discuss specific regulatory, code, or case law. After completion of this case, students will be able to<ul><li>reinforce the magnitude and importance of tax planning for financial performance;</li><li>facilitate a discussion of tax terminology that can be understood even by non-tax professionals (e.g., tax inversions, transfer pricing, the difference between effective tax rate and marginal tax rate, and the difference between a company’s headquarters and its tax domicile);</li><li>identify and value tax savings in a merger and acquisition context, where tax savings are partly prospective, and thus require discounting to be brought to present value; and </li><li>discuss related managerial issues that are important to tax planning but that students do not often associate with tax management, such as the evolving nature of tax law and the ethical debate surrounding tax planning techniques.</li><ul>

• tax, tax inversion, transfer pricing, mergers and acquisitions, valuation