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The Real Reason Why Pfizer(PFE) Is Canceling AstraZeneca Bid


Pfizer (PFE) cancelled its bid for British drugmaker AstraZeneca (ANZ.L)after the third rejection of the AZ board. Pfizer says is doesn't want to pursue an unfriendly, hostile takeover.

The real reason however for pulling the plug is the time frame. The takeover has to be closed for 2015, otherwise certain tax advantages could not be locked in.

US Government should lower the tax bar in order to prevent US companies from paying taxes in European tax havens.

The acquisition soap around the pharmaceutical companies Pfizer (U.S.) and AstraZeneca (UK , Sweden ) kept the financial world busy for several weeks. U.S.-based Pfizer wanted to acquire the British - Swedish conglomerate for the t$116 billion. After raising its bid twice, Pfizer yesterday pulled the plug: Pfizer said that after the AstraZeneca management rejection, it wouldn't seek a hostile takeover.

Why would Pfizer acquire AstraZeneca?

The pharmaceutical industry is struggling with growth and innovation. Developing new products is costly, and takes time. It is easier for the cash-rich Pharma's to let the smaller companies do the research, and then just buy the ones who are successful. AstraZeneca is one of the companies who have very promising products in the pipeline in the field of cancer research. It would therefore form a nice addition to the oncology portfolio of Pfizer.

Although Pfizer therefore has very good reasons to acquire AstraZeneca the acquisition proposal shines a different light on the takeover intentions.

Tax inversion

To fully understand Pfizer's reasons we have to take a look at the difference in tax between the homelands of both companies. In England, companies pay 21 %, in the U.S. 35 %. In addition, the U.S. tax system is global: it doesn't matter in what corner of the world U.S. businesses make their profits , when the money returns to the U.S., the IRS makes sure taxes will be paid up to the 35%.

This has led to massive flight to profit centers abroad. According to market researchers, the amount of foreign accounts has already risen to $ 1 trillion or more. In order to avoid U.S. taxes, the 'tax inversion "trick is invented. It works simple: by merging or taking over a company in another country (with a lower tax regime), the U.S. company makes sure they no longer fall under the jurisdiction of the IRS, but are eligible to pay their taxes in the country of the other company.

In this case, Pfizer would set up a new structure with AstraZeneca under British law. This would save the U.S. company billions on tax expenditures. The last year, Pfizer's tax pressure was 27%.

Because of the fact that President Obama has announced new measures against tax inversion, to be implemented before January 1, 2015, Pfizer would close the deal with AstraZeneca utterly by the end of this year. Therefore, after the latest rejection of AstraZeneca's management, a hostile takeover would take too long.

The massive stalling of profits of U.S. companies abroad is a big problem for the U.S. government. Sooner or later, they might have to adjust their taxing regime. Alongside the U.S. companies, European countries are profiting big time from the tax routes U.S. companies are taking. Obama can think of a thousand measures of preventing American companies from paying tax abroad, the best measure might be to simply lower the tax rate to international standards.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.