Actavis brought the parts and sold itself. what left is all the parts.
Glossary of Hostile Takeover Terms with Discussion
- Thread starter Shoham
- Start date
Actavis brought the parts and sold itself. what left is all the parts.
Yes, the real question arises from what long value do the parts have. My take is little compared to stand alone.
Odd how Valeants implosion is destroying this biotech/Pharma business model. Good luck to everyone in the coming months.
- Shoham Apr 04, 2016 at 11:22: PM
Shoham
Member
I did say that the Allergan standalone, as reflected in the Actavis transaction and market pricing before PFE came along, was $280. However, that was before Valeant spilled collateral damage on the entire industry (in earlier posts, I posited that part of the reason for the large spread was that the market was depressing the value of the AGN standalone alternative on account of the Valeant situation).
I would love to say that the price would come back. Hopefully it will, but it may take a while. Some of the collateral damage Valeant has been inflicting on the entire sector will pass -- as investor become comfortable that the most egregious issues are specific to Valeant and not emblematic of the industry as a whole. Other damage -- for example to increased policymakers' and payers' pricing scrutiny -- will damage the good corporate citizens as well as the scofflaws. It's worth noting that PFE (which was not damaged by Valeant because they are viewed as too different to have any comparison) actually inched up on tonight's news (indicating that their shareholders are slightly happier without the merger than they were with it). This is a farther indication that PFE shareholders felt that the price they agreed to pay for AGN in November is higher than, as presently value, AGN is worth.
The post-Actavis-merger Allergan management had a strong story that the market loved (the "Growth Pharma" story). They may have damaged the credibility of that story by quickly running off to another merger without ever actualizing the plan they sold the investors on. Now that the merger is probably dead, will they pick up the pieces and show that they still can make "Growth Pharma" a reality; or was it all along just a good-sounding concept with no real content and no execution plan? Even if the former, it will be hard to convince skeptical investors that this time management really means it. If they don't rapidly regain credibility, some investors might even ask, politely, if another management team -- that is more interested in execution -- would be appropriate.
Teva is still in play, but, as per my prior post, now is a good time to be paranoid about all transactions.
Dan.
Dan,
The after-market price movement wasn't because of happiness with the deal failing. I think it has more to do with the ARBs covering their shorts. It was well documented that the last two weeks saw 150M shares of PFE shorted. With the news they most likely dumped the long AGN and covered their short PFE positions.
what's most interesting to me is the timing ... seems like Treasury and the IRS waited for ARBs to enter before dropping a bomb. Maybe teaching the hedge funds a lesson in the process?
I agree. I posted on this last week. The arbs were in and now they are out. There is going to be chaos as the "smart money" unwinds. Hard to tell where it will all end up until the hedges and arbs get out.
P551
- Shoham Apr 05, 2016 at 06:24: AM
Shoham
Member
I never really bought into the story that the arbs got in (whatever the various indicators were reading). If they were, in any meaningful way, then the spread would have rapidly diminished. Can't have it both ways. Unless, of course, half the arbs were betting against the merger (entirely possible).
It would be kind of fun if Treasury was playing mind games with Wall Street, wouldn't it? Even if not, just speculating about it can bring a smile to one's face. However, in real life, that would be a serious breach of public trust and the rule of law (government officials can't just use the power of their office to deliberately harm law-abiding individuals, however they may loath their activities). And it wouldn't stay secret for very long. If any Wall Streeter suspected the government was illegally targeting them (and those guys definitely have an overdeveloped sense of paranoia), they would subpoena those officials so fast it will make the head of the Wall Street bull statue spin. So, regretfully, no, Treasury was running on it's own clock, and the arbs on their.
Dan.
Maybe the arbs weren't in - but there is no plausible explanantion for the dramatic increase in PFE short sales other than the classic merger arb. With dark pool exchanges there is no easy way to always see the impact of these positions. And as you state, others may have been betting against the deal, but the published short sale stats on AGN don't indicate that. Anyway, it's partly irrelevant now - what we need to see is how PFE/AGN react to the unilateral Treasury decision. It doesn't seem like they will give up the fight, but at the same time, it doesn't seem like there is a possibility to win!I never really bought into the story that the arbs got in (whatever the various indicators were reading). If they were, in any meaningful way, then the spread would have rapidly diminished. Can't have it both ways. Unless, of course, half the arbs were betting against the merger (entirely possible).
It would be kind of fun if Treasury was playing mind games with Wall Street, wouldn't it? Even if not, just speculating about it can bring a smile to one's face. However, in real life, that would be a serious breach of public trust and the rule of law (government officials can't just use the power of their office to deliberately harm law-abiding individuals, however they may loath their activities). And it wouldn't stay secret for very long. If any Wall Streeter suspected the government was illegally targeting them (and those guys definitely have an overdeveloped sense of paranoia), they would subpoena those officials so fast it will make the head of the Wall Street bull statue spin. So, regretfully, no, Treasury was running on it's own clock, and the arbs on their.
Dan.
It strikes me as odd that the Treasury can just make a unilateral decision that is obviously politically motivated without there being any opposition or any legal approval. They basically rewrote the play book on their own. I'm not sure how this can be legal - for them to come out and force a recalculation in the history of transactions. Seems like revisionist history. I know there are provisions for this kind of look back from the IRS in tax free spinoffs, but these provisions are part of tax law. This move by Lew just plain seems vindictive and almost personal.
Sadly, the AGN employees get to endure more uncertainty and suffering.
P551
Another interesting development ... Valeant says the special ad-hoc audit committee didn't find anything else in it's review. Convenient that is released at the same time as this inversion announcement, and it's hardly being talked about.
If we use Valeant's logic then the financials should on deck ready to be released. Anyone thing this will happen? Me neither.
OK, here comes the soapbox pitch. I'm disillusioned by the Treasury move on inversions. I thinks it's a capricious and targeted attack on PFE/AGN and the fact that Treasury can announce a new "law" out of the blue - and apply it retroactively, worse yet - is unconscionable.
This move sets a dangerous precedent that spooks me to the core. Stable governments and level playing fields are what define a "safe" investment environment. The US should be the best example of this. When I see the Treasury being manipulated by political forces to apply revisionist laws to satisfy political ends, it makes me sick.
I was always more in favor of this deal than not, but I honestly believed the deal would stand on its own merits. I trusted the "system" to be fair. It clearly isn't. This should worry all of us.
What's to stop the Treasury, under our remorseless administration, to retroactively put in place onerous tax rates to raise taxes to serve their own needs or agenda? How about we raise the tax rate to 50% on all of our wages going back 3 years? Sound good?
Moves like the Treasury made should only get to be applied prospectively. Doing anything else is as un-American as the supposed tax dodgers are!
Phew...got that off my chest. Now I can move forward!
P551
This move sets a dangerous precedent that spooks me to the core. Stable governments and level playing fields are what define a "safe" investment environment. The US should be the best example of this. When I see the Treasury being manipulated by political forces to apply revisionist laws to satisfy political ends, it makes me sick.
I was always more in favor of this deal than not, but I honestly believed the deal would stand on its own merits. I trusted the "system" to be fair. It clearly isn't. This should worry all of us.
What's to stop the Treasury, under our remorseless administration, to retroactively put in place onerous tax rates to raise taxes to serve their own needs or agenda? How about we raise the tax rate to 50% on all of our wages going back 3 years? Sound good?
Moves like the Treasury made should only get to be applied prospectively. Doing anything else is as un-American as the supposed tax dodgers are!
Phew...got that off my chest. Now I can move forward!
P551
- Shoham Apr 05, 2016 at 05:49: PM
Shoham
Member
(Opinion only here)
After just posting about how it would be illegal for public officials to use their powers to target lawful entities, it's a bit awkward to almost be arguing the opposite.
Treasury's objection is legitimate. Yes, it was raised in a heightened political climate -- where government lawyers were undoubtedly under pressure to find a legal way to achieve a targeted political goal -- but, they did, legitimately find an articulation that distinguishes abusive inversions from "acceptable" ones. In general, regulators can, and do, disallow specific transactions and articulate new immediate rules that affect already-announced deals (even already closed ones), to stop abusive practices that are clearly beyond the intended scope of the legal framework. (Long time followers of this thread would remember a very similar situation with AbbVie failed acquisition of Shire. Old Allergan was trying to buy Shire to bulk up in defense against Valeant. AbbVie outbid Allergan and signed a deal whose value creation was entirely through inversion. Pyott, a renown skeptic of inversions, despite the intense pressure to make a deal, would not overbid and allowed AbbVie to "win" the bidding. Treasury then changed the inversion rules in midstream, and the deal immediately cratered -- one of the many instances during the takeover battle where the steeled discipline of the old Allergan board dodged a bullet).
An underlying principle of (any) tax code is that transactions whose sole purpose is to reduce taxes may be consummated, but, for tax purposes, it's as if they never happened. (This is not just regarding mergers, but anywhere in the tax code. If you and your employer agree that they will give half your salary to you and the other half to your stay-at-home girlfriend/boyfriend, allowing you to lower your tax bracket [and assuming you are open about it]; the taxman won't stop the deal, but they will tell you to keep paying taxes as if the deal never happened).
Suppose BMW were to buy a small US glass factory, that factory will become (part of) a foreign corporation, no longer subject to US worldwide taxation. It would be unrealistic for Treasury to try to discern if the purpose of the transaction is just gaming tax rules or if BMW really needs a US glass factory. So, unless this deal is entirely devoid of non-tax purposes, it will not be questioned. However, if a pushcart apple vendor in Timbuktu were to buy GE (with the latter re-domiciling to scenic Mali); there would be little question that the deal is intended to abuse the tax code. Treasury won't block the deal, they would simply say that as far as tax rules are concerned, GE is still an American company, and the pushcart vendor is owned by GE, not the other way around. So, the obvious question, to those who always want to be on the edge (and, in competitive environment, if you are not on the edge, you might be uncompetitive), what's the break point between a deal that would be acceptable and one which would be ruled abusive?
Long ago, the policy was that the IRS doesn't make rulings on hypothetical situations. You sign your deal, you close the transaction, you integrate the companies, you file your taxes, you get audited, and then the IRS comes back and say that they disagree with your tax treatment, they might even push criminal charges if they think your claims are too aggressive. It was "do first, we'll tell you if it's legal later." Obviously, that wasn't compatible with a modern global economy in which even the simplest deals can have major tax complexities where reasonable people can disagree. So, over the past few decades, the IRS and Treasury moved toward a more predictable stance. If you present a contemplated deal, they will gladly tell you how they plan to rule on it and give you written guarantees that they won't change their mind later. If you are engineering a deal and want to know their parameters, they'll try to be as open as possible regarding what they consider allowable and what's abusive.
The various inversion percentages that they publish, or other rules and details, are not cast in stone. What is cast in stone is the overarching rule of discerning transaction with a business purpose from sham tax abuses. Treasury, if they feel a threshold or a mechanism is abused, can change it, even retroactively -- even after a transaction closed (unless, of course, they gave you that written guarantee; which is why a standard checkbox item in every deal nowadays is to get that IRS guarantee).
The percentage rules have set a limit where the buyer has to be at least comparable in size to the acquisition. If not, then, as far as the IRS is concerned, the much bigger entity is the one buying the smaller one. Smart accountants and attorneys may find ways to game a bit around rules and parameters; but if anyone thinks that they found a clever way to get a pushcart vendor to buy GE, Treasury has news for them: "NO." (Whatever cute loophole they think they may have found). If necessary, Treasury will rewrite the rules to block that loophole; even retroactively.
One such loophole might be for the pushcart vendor to buy an equal-sized US company (thus meeting the inversion rules threshold) and double in size. Then, immediately afterward, buy another US company that is equal to their new (recently doubled) size, and thus double again. They can keep doubling at a rapid pace until, you guessed it, they are big enough to buy GE. Now, any loophole that allows a Timbuktu apple cart vendor to swallow GE is some loophole!! (just for clarity, these are all tax-purposed transaction, as far as actual ownership and control, it would be GE pulling the strings all along; with the pushcart vendor just a puppet).
This is basically what Treasury is saying this transaction is all about -- a tiny pushcart vendor, doubling through an inversion every few months, trying to buy Pfizer. So, they are not saying you can't do it; they are just saying that, for tax purposes, it will be Pfizer buying Allergan, not the other way around. And, for future reference, they are letting everyone know that if you buy an American company, you can't count the size of that American company as part of the "foreign" portion of the next transaction for another 3 years. You can still play this doubling game, if you want to, but you are slowed to doubling every 3 years (which is plenty fast enough if your transactions have legitimate business purposes; but not if you are a pushcart vendor trying to buy GE).
Having defended Treasury conduct in this situation, I'll be remiss if I didn't add that their conduct is in trying to sustain and defend an unsustainable and indefensible disconnect in US tax laws (where the US is the only country that taxes the worldwide profits of domestic corporations -- thus creating a distinctive disadvantage to being US domiciled). Longtime readers of this thread know that, all along, and with a multitude of actual and contemplated transactions, I've maintained my dual hostility to the tax rules that encourage inversions and to the inversions that are instigated by those rules. Blocking this transaction or that mechanism doesn't solve the problem; only (very temporarily) slows and redirects the outflow path. Unless the US finds a way to harmonize it's tax laws with the rest of the world, one way or another, substantially all remaining major US multinationals will expatriate within a very few years. Rather than going in that direction, the policy winds are blowing in the directions of blocking individual deals and mechanisms rather than harmonizing the tax laws that are nurturing these deals. No dam can indefinitely contain major corporations in a tax-disadvantageous domicile; and sticking fingers into the many leaks the existing dyke has sprouted won't work very long.
Dan.
I dont know what you do for a living but I hope it includes teaching or instruction, Dan. You are a master.(Opinion only here)
After just posting about how it would be illegal for public officials to use their powers to target lawful entities, it's a bit awkward to almost be arguing the opposite.
Treasury's objection is legitimate. Yes, it was raised in a heightened political climate -- where government lawyers were undoubtedly under pressure to find a legal way to achieve a targeted political goal -- but, they did, legitimately find an articulation that distinguishes abusive inversions from "acceptable" ones. In general, regulators can, and do, disallow specific transactions and articulate new immediate rules that affect already-announced deals (even already closed ones), to stop abusive practices that are clearly beyond the intended scope of the legal framework. (Long time followers of this thread would remember a very similar situation with AbbVie failed acquisition of Shire. Old Allergan was trying to buy Shire to bulk up in defense against Valeant. AbbVie outbid Allergan and signed a deal whose value creation was entirely through inversion. Pyott, a renown skeptic of inversions, despite the intense pressure to make a deal, would not overbid and allowed AbbVie to "win" the bidding. Treasury then changed the inversion rules in midstream, and the deal immediately cratered -- one of the many instances during the takeover battle where the steeled discipline of the old Allergan board dodged a bullet).
An underlying principle of (any) tax code is that transactions whose sole purpose is to reduce taxes may be consummated, but, for tax purposes, it's as if they never happened. (This is not just regarding mergers, but anywhere in the tax code. If you and your employer agree that they will give half your salary to you and the other half to your stay-at-home girlfriend/boyfriend, allowing you to lower your tax bracket [and assuming you are open about it]; the taxman won't stop the deal, but they will tell you to keep paying taxes as if the deal never happened).
Suppose BMW were to buy a small US glass factory, that factory will become (part of) a foreign corporation, no longer subject to US worldwide taxation. It would be unrealistic for Treasury to try to discern if the purpose of the transaction is just gaming tax rules or if BMW really needs a US glass factory. So, unless this deal is entirely devoid of non-tax purposes, it will not be questioned. However, if a pushcart apple vendor in Timbuktu were to buy GE (with the latter re-domiciling to scenic Mali); there would be little question that the deal is intended to abuse the tax code. Treasury won't block the deal, they would simply say that as far as tax rules are concerned, GE is still an American company, and the pushcart vendor is owned by GE, not the other way around. So, the obvious question, to those who always want to be on the edge (and, in competitive environment, if you are not on the edge, you might be uncompetitive), what's the break point between a deal that would be acceptable and one which would be ruled abusive?
Long ago, the policy was that the IRS doesn't make rulings on hypothetical situations. You sign your deal, you close the transaction, you integrate the companies, you file your taxes, you get audited, and then the IRS comes back and say that they disagree with your tax treatment, they might even push criminal charges if they think your claims are too aggressive. It was "do first, we'll tell you if it's legal later." Obviously, that wasn't compatible with a modern global economy in which even the simplest deals can have major tax complexities where reasonable people can disagree. So, over the past few decades, the IRS and Treasury moved toward a more predictable stance. If you present a contemplated deal, they will gladly tell you how they plan to rule on it and give you written guarantees that they won't change their mind later. If you are engineering a deal and want to know their parameters, they'll try to be as open as possible regarding what they consider allowable and what's abusive.
The various inversion percentages that they publish, or other rules and details, are not cast in stone. What is cast in stone is the overarching rule of discerning transaction with a business purpose from sham tax abuses. Treasury, if they feel a threshold or a mechanism is abused, can change it, even retroactively -- even after a transaction closed (unless, of course, they gave you that written guarantee; which is why a standard checkbox item in every deal nowadays is to get that IRS guarantee).
The percentage rules have set a limit where the buyer has to be at least comparable in size to the acquisition. If not, then, as far as the IRS is concerned, the much bigger entity is the one buying the smaller one. Smart accountants and attorneys may find ways to game a bit around rules and parameters; but if anyone thinks that they found a clever way to get a pushcart vendor to buy GE, Treasury has news for them: "NO." (Whatever cute loophole they think they may have found). If necessary, Treasury will rewrite the rules to block that loophole; even retroactively.
One such loophole might be for the pushcart vendor to buy an equal-sized US company (thus meeting the inversion rules threshold) and double in size. Then, immediately afterward, buy another US company that is equal to their new (recently doubled) size, and thus double again. They can keep doubling at a rapid pace until, you guessed it, they are big enough to buy GE. Now, any loophole that allows a Timbuktu apple cart vendor to swallow GE is some loophole!! (just for clarity, these are all tax-purposed transaction, as far as actual ownership and control, it would be GE pulling the strings all along; with the pushcart vendor just a puppet).
This is basically what Treasury is saying this transaction is all about -- a tiny pushcart vendor, doubling through an inversion every few months, trying to buy Pfizer. So, they are not saying you can't do it; they are just saying that, for tax purposes, it will be Pfizer buying Allergan, not the other way around. And, for future reference, they are letting everyone know that if you buy an American company, you can't count the size of that American company as part of the "foreign" portion of the next transaction for another 3 years. You can still play this doubling game, if you want to, but you are slowed to doubling every 3 years (which is plenty fast enough if your transactions have legitimate business purposes; but not if you are a pushcart vendor trying to buy GE).
Having defended Treasury conduct in this situation, I'll be remiss if I didn't add that their conduct is in trying to sustain and defend an unsustainable and indefensible disconnect in US tax laws (where the US is the only country that taxes the worldwide profits of domestic corporations -- thus creating a distinctive disadvantage to being US domiciled). Longtime readers of this thread know that, all along, and with a multitude of actual and contemplated transactions, I've maintained my dual hostility to the tax rules that encourage inversions and to the inversions that are instigated by those rules. Blocking this transaction or that mechanism doesn't solve the problem; only (very temporarily) slows and redirects the outflow path. Unless the US finds a way to harmonize it's tax laws with the rest of the world, one way or another, substantially all remaining major US multinationals will expatriate within a very few years. Rather than going in that direction, the policy winds are blowing in the directions of blocking individual deals and mechanisms rather than harmonizing the tax laws that are nurturing these deals. No dam can indefinitely contain major corporations in a tax-disadvantageous domicile; and sticking fingers into the many leaks the existing dyke has sprouted won't work very long.
Dan.
Dan,(Opinion only here)
After just posting about how it would be illegal for public officials to use their powers to target lawful entities, it's a bit awkward to almost be arguing the opposite.
Treasury's objection is legitimate. Yes, it was raised in a heightened political climate -- where government lawyers were undoubtedly under pressure to find a legal way to achieve a targeted political goal -- but, they did, legitimately find an articulation that distinguishes abusive inversions from "acceptable" ones. In general, regulators can, and do, disallow specific transactions and articulate new immediate rules that affect already-announced deals (even already closed ones), to stop abusive practices that are clearly beyond the intended scope of the legal framework. (Long time followers of this thread would remember a very similar situation with AbbVie failed acquisition of Shire. Old Allergan was trying to buy Shire to bulk up in defense against Valeant. AbbVie outbid Allergan and signed a deal whose value creation was entirely through inversion. Pyott, a renown skeptic of inversions, despite the intense pressure to make a deal, would not overbid and allowed AbbVie to "win" the bidding. Treasury then changed the inversion rules in midstream, and the deal immediately cratered -- one of the many instances during the takeover battle where the steeled discipline of the old Allergan board dodged a bullet).
An underlying principle of (any) tax code is that transactions whose sole purpose is to reduce taxes may be consummated, but, for tax purposes, it's as if they never happened. (This is not just regarding mergers, but anywhere in the tax code. If you and your employer agree that they will give half your salary to you and the other half to your stay-at-home girlfriend/boyfriend, allowing you to lower your tax bracket [and assuming you are open about it]; the taxman won't stop the deal, but they will tell you to keep paying taxes as if the deal never happened).
Suppose BMW were to buy a small US glass factory, that factory will become (part of) a foreign corporation, no longer subject to US worldwide taxation. It would be unrealistic for Treasury to try to discern if the purpose of the transaction is just gaming tax rules or if BMW really needs a US glass factory. So, unless this deal is entirely devoid of non-tax purposes, it will not be questioned. However, if a pushcart apple vendor in Timbuktu were to buy GE (with the latter re-domiciling to scenic Mali); there would be little question that the deal is intended to abuse the tax code. Treasury won't block the deal, they would simply say that as far as tax rules are concerned, GE is still an American company, and the pushcart vendor is owned by GE, not the other way around. So, the obvious question, to those who always want to be on the edge (and, in competitive environment, if you are not on the edge, you might be uncompetitive), what's the break point between a deal that would be acceptable and one which would be ruled abusive?
Long ago, the policy was that the IRS doesn't make rulings on hypothetical situations. You sign your deal, you close the transaction, you integrate the companies, you file your taxes, you get audited, and then the IRS comes back and say that they disagree with your tax treatment, they might even push criminal charges if they think your claims are too aggressive. It was "do first, we'll tell you if it's legal later." Obviously, that wasn't compatible with a modern global economy in which even the simplest deals can have major tax complexities where reasonable people can disagree. So, over the past few decades, the IRS and Treasury moved toward a more predictable stance. If you present a contemplated deal, they will gladly tell you how they plan to rule on it and give you written guarantees that they won't change their mind later. If you are engineering a deal and want to know their parameters, they'll try to be as open as possible regarding what they consider allowable and what's abusive.
The various inversion percentages that they publish, or other rules and details, are not cast in stone. What is cast in stone is the overarching rule of discerning transaction with a business purpose from sham tax abuses. Treasury, if they feel a threshold or a mechanism is abused, can change it, even retroactively -- even after a transaction closed (unless, of course, they gave you that written guarantee; which is why a standard checkbox item in every deal nowadays is to get that IRS guarantee).
The percentage rules have set a limit where the buyer has to be at least comparable in size to the acquisition. If not, then, as far as the IRS is concerned, the much bigger entity is the one buying the smaller one. Smart accountants and attorneys may find ways to game a bit around rules and parameters; but if anyone thinks that they found a clever way to get a pushcart vendor to buy GE, Treasury has news for them: "NO." (Whatever cute loophole they think they may have found). If necessary, Treasury will rewrite the rules to block that loophole; even retroactively.
One such loophole might be for the pushcart vendor to buy an equal-sized US company (thus meeting the inversion rules threshold) and double in size. Then, immediately afterward, buy another US company that is equal to their new (recently doubled) size, and thus double again. They can keep doubling at a rapid pace until, you guessed it, they are big enough to buy GE. Now, any loophole that allows a Timbuktu apple cart vendor to swallow GE is some loophole!! (just for clarity, these are all tax-purposed transaction, as far as actual ownership and control, it would be GE pulling the strings all along; with the pushcart vendor just a puppet).
This is basically what Treasury is saying this transaction is all about -- a tiny pushcart vendor, doubling through an inversion every few months, trying to buy Pfizer. So, they are not saying you can't do it; they are just saying that, for tax purposes, it will be Pfizer buying Allergan, not the other way around. And, for future reference, they are letting everyone know that if you buy an American company, you can't count the size of that American company as part of the "foreign" portion of the next transaction for another 3 years. You can still play this doubling game, if you want to, but you are slowed to doubling every 3 years (which is plenty fast enough if your transactions have legitimate business purposes; but not if you are a pushcart vendor trying to buy GE).
Having defended Treasury conduct in this situation, I'll be remiss if I didn't add that their conduct is in trying to sustain and defend an unsustainable and indefensible disconnect in US tax laws (where the US is the only country that taxes the worldwide profits of domestic corporations -- thus creating a distinctive disadvantage to being US domiciled). Longtime readers of this thread know that, all along, and with a multitude of actual and contemplated transactions, I've maintained my dual hostility to the tax rules that encourage inversions and to the inversions that are instigated by those rules. Blocking this transaction or that mechanism doesn't solve the problem; only (very temporarily) slows and redirects the outflow path. Unless the US finds a way to harmonize it's tax laws with the rest of the world, one way or another, substantially all remaining major US multinationals will expatriate within a very few years. Rather than going in that direction, the policy winds are blowing in the directions of blocking individual deals and mechanisms rather than harmonizing the tax laws that are nurturing these deals. No dam can indefinitely contain major corporations in a tax-disadvantageous domicile; and sticking fingers into the many leaks the existing dyke has sprouted won't work very long.
Dan.
Thanks for the explanation. I "get it" and have seen this take form in terms of IRS situations before. But this one feels painfully targeted to our deal and that makes it a pure political move in my opinion. It's another case of Obama and his anti business stance weaponizing an arm of the government to do his bidding. It's a bad move done in an election year to curry favor from voters. Ridiculous .
On a different note, the deal will be ended mutually tomorrow before the bell so no breakup fee I'm guessing due to mutual termination. Now we can see each respective management team "do their thing". I hope AGN starts to recover back to its unaffected price territory. With all of the sector down it won't get back right away though. The curse of Valeant took care of that for awhile.
P551
This one's for u DAN ! You called this one too; enjoy
NEW YORK (TheStreet) -- "This is the beginning of the process," TheStreet's Jim Cramer said on CNBC's Squawk on the Street on Tuesday morning, referring to the completion of Valeant Pharmaceuticals' (VRX) internal review.
Shares of Valeant are rallying 10.84% to $28.94 this morning after the Canadian pharmaceutical company said further restatements will not be required following a review of its former partnership with Philidor, a specialty online pharmacy.
"When a company declares itself clean, it means nothing," Cramer explained. "The government does not care at all about your audit."
Cramer pointed out that Valeant said the company did not have to change anything, which is not the same as saying "we are clear."
Hopefully most of the merger arb trading is done now. And we can recover our AGN price. Recall I posted the increase in short selling on PFE as part of the arb. Those shorts had to cover their positions by buying up PFE, raising the price. Conversely the long play on AGN forced the arbs to sell, driving the AGN price down.
Based on share volumes traded it looks like the unwinding might be mostly complete. Soon enough we can see more normal trading.
As an update to my previous post, I was incorrect. PFE will pay AGN $400MM.
P551
Based on share volumes traded it looks like the unwinding might be mostly complete. Soon enough we can see more normal trading.
As an update to my previous post, I was incorrect. PFE will pay AGN $400MM.
P551
it is over deal mutually will be terminated by both companies
(Opinion only here)
After just posting about how it would be illegal for public officials to use their powers to target lawful entities, it's a bit awkward to almost be arguing the opposite.
Treasury's objection is legitimate. Yes, it was raised in a heightened political climate -- where government lawyers were undoubtedly under pressure to find a legal way to achieve a targeted political goal -- but, they did, legitimately find an articulation that distinguishes abusive inversions from "acceptable" ones. In general, regulators can, and do, disallow specific transactions and articulate new immediate rules that affect already-announced deals (even already closed ones), to stop abusive practices that are clearly beyond the intended scope of the legal framework. (Long time followers of this thread would remember a very similar situation with AbbVie failed acquisition of Shire. Old Allergan was trying to buy Shire to bulk up in defense against Valeant. AbbVie outbid Allergan and signed a deal whose value creation was entirely through inversion. Pyott, a renown skeptic of inversions, despite the intense pressure to make a deal, would not overbid and allowed AbbVie to "win" the bidding. Treasury then changed the inversion rules in midstream, and the deal immediately cratered -- one of the many instances during the takeover battle where the steeled discipline of the old Allergan board dodged a bullet).
An underlying principle of (any) tax code is that transactions whose sole purpose is to reduce taxes may be consummated, but, for tax purposes, it's as if they never happened. (This is not just regarding mergers, but anywhere in the tax code. If you and your employer agree that they will give half your salary to you and the other half to your stay-at-home girlfriend/boyfriend, allowing you to lower your tax bracket [and assuming you are open about it]; the taxman won't stop the deal, but they will tell you to keep paying taxes as if the deal never happened).
Suppose BMW were to buy a small US glass factory, that factory will become (part of) a foreign corporation, no longer subject to US worldwide taxation. It would be unrealistic for Treasury to try to discern if the purpose of the transaction is just gaming tax rules or if BMW really needs a US glass factory. So, unless this deal is entirely devoid of non-tax purposes, it will not be questioned. However, if a pushcart apple vendor in Timbuktu were to buy GE (with the latter re-domiciling to scenic Mali); there would be little question that the deal is intended to abuse the tax code. Treasury won't block the deal, they would simply say that as far as tax rules are concerned, GE is still an American company, and the pushcart vendor is owned by GE, not the other way around. So, the obvious question, to those who always want to be on the edge (and, in competitive environment, if you are not on the edge, you might be uncompetitive), what's the break point between a deal that would be acceptable and one which would be ruled abusive?
Long ago, the policy was that the IRS doesn't make rulings on hypothetical situations. You sign your deal, you close the transaction, you integrate the companies, you file your taxes, you get audited, and then the IRS comes back and say that they disagree with your tax treatment, they might even push criminal charges if they think your claims are too aggressive. It was "do first, we'll tell you if it's legal later." Obviously, that wasn't compatible with a modern global economy in which even the simplest deals can have major tax complexities where reasonable people can disagree. So, over the past few decades, the IRS and Treasury moved toward a more predictable stance. If you present a contemplated deal, they will gladly tell you how they plan to rule on it and give you written guarantees that they won't change their mind later. If you are engineering a deal and want to know their parameters, they'll try to be as open as possible regarding what they consider allowable and what's abusive.
The various inversion percentages that they publish, or other rules and details, are not cast in stone. What is cast in stone is the overarching rule of discerning transaction with a business purpose from sham tax abuses. Treasury, if they feel a threshold or a mechanism is abused, can change it, even retroactively -- even after a transaction closed (unless, of course, they gave you that written guarantee; which is why a standard checkbox item in every deal nowadays is to get that IRS guarantee).
The percentage rules have set a limit where the buyer has to be at least comparable in size to the acquisition. If not, then, as far as the IRS is concerned, the much bigger entity is the one buying the smaller one. Smart accountants and attorneys may find ways to game a bit around rules and parameters; but if anyone thinks that they found a clever way to get a pushcart vendor to buy GE, Treasury has news for them: "NO." (Whatever cute loophole they think they may have found). If necessary, Treasury will rewrite the rules to block that loophole; even retroactively.
One such loophole might be for the pushcart vendor to buy an equal-sized US company (thus meeting the inversion rules threshold) and double in size. Then, immediately afterward, buy another US company that is equal to their new (recently doubled) size, and thus double again. They can keep doubling at a rapid pace until, you guessed it, they are big enough to buy GE. Now, any loophole that allows a Timbuktu apple cart vendor to swallow GE is some loophole!! (just for clarity, these are all tax-purposed transaction, as far as actual ownership and control, it would be GE pulling the strings all along; with the pushcart vendor just a puppet).
This is basically what Treasury is saying this transaction is all about -- a tiny pushcart vendor, doubling through an inversion every few months, trying to buy Pfizer. So, they are not saying you can't do it; they are just saying that, for tax purposes, it will be Pfizer buying Allergan, not the other way around. And, for future reference, they are letting everyone know that if you buy an American company, you can't count the size of that American company as part of the "foreign" portion of the next transaction for another 3 years. You can still play this doubling game, if you want to, but you are slowed to doubling every 3 years (which is plenty fast enough if your transactions have legitimate business purposes; but not if you are a pushcart vendor trying to buy GE).
Having defended Treasury conduct in this situation, I'll be remiss if I didn't add that their conduct is in trying to sustain and defend an unsustainable and indefensible disconnect in US tax laws (where the US is the only country that taxes the worldwide profits of domestic corporations -- thus creating a distinctive disadvantage to being US domiciled). Longtime readers of this thread know that, all along, and with a multitude of actual and contemplated transactions, I've maintained my dual hostility to the tax rules that encourage inversions and to the inversions that are instigated by those rules. Blocking this transaction or that mechanism doesn't solve the problem; only (very temporarily) slows and redirects the outflow path. Unless the US finds a way to harmonize it's tax laws with the rest of the world, one way or another, substantially all remaining major US multinationals will expatriate within a very few years. Rather than going in that direction, the policy winds are blowing in the directions of blocking individual deals and mechanisms rather than harmonizing the tax laws that are nurturing these deals. No dam can indefinitely contain major corporations in a tax-disadvantageous domicile; and sticking fingers into the many leaks the existing dyke has sprouted won't work very long.
Dan.
Dan, in almost two years of following your well thought out wisdom which has been amazingly predictive, yor last post finally helped me to get what is going on.
thank you!