Pfizer Waiting on Tax Reform to Avoid Mispriced Corporate Deals

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By Allyson Versprille

A Pfizer executive said the company is backing off large corporate deals until it’s clear how tax reform will affect asset values—a move analysts say will prevent the company from engaging in transactions that are mispriced.

Pfizer Inc. looks at corporate deals “as a way of improving returns for shareholders, and right now I would reaffirm that there are short-term events in the marketplace such as a tax reform that may change asset values,” said Ian C. Read, chief executive officer of Pfizer, one of the world’s largest pharmaceutical companies. Any focus on large corporate restructurings “to my point of view is somewhat delayed by a resolution of that,” Read said Aug. 1 in a quarterly earnings call with shareholders.

“Tax rates have a direct and immediate impact on asset values,” said Robert Willens, president of tax and consulting firm Robert Willens LLC in New York. “Pfizer doesn’t want to ‘misprice’ an acquisition if, in the near term, asset values are going to change because of a change in tax rates,” he told Bloomberg BNA Aug. 1 in an email.

And Pfizer likely isn’t alone in having these concerns. “I think many companies are leery of tax reform and are shying away, with some notable exceptions, from making acquisitions that might, in the wake of tax reform, become mispriced,” Willens said.

Tony Butler, managing director and senior equity analyst at Guggenheim Securities LLC, said Pfizer doesn’t want to “go out and frivolously do something and then a year later or six months later, there’s some reform, and what they bought they overpaid for or underpaid for.”

However, Butler said for Pfizer it’s less about tax reform as a standalone issue. The company views corporate tax reform through the lens of maximizing shareholder value, he said. The way Pfizer looks at it is: “Every dollar that we have in excess cash, we want to redeploy that in the best interests of shareholders,” he said. If the U.S. lowers corporate tax rates, that could free up extra cash that the company could use to to reinvest in new projects or pay in dividends to shareholders, he said.

Repatriation, Territorial System

On the earnings call, Frank A. D’Amelio, executive vice president of business operations and chief financial officer for Pfizer, said that the company’s top priorities for tax reform—in addition to lower corporate tax rates—are moving to a territorial tax system where only domestic income is taxed by the U.S. and the ability to repatriate overseas profits.

Both Democrats and Republicans want to return the estimated $3 trillion in corporate earnings that is kept overseas to defer U.S. taxes.

Congress allowed for a repatriation tax holiday in 2004, where companies could bring back cash at a 5.25 percent tax rate. Democrats have since criticized the move, saying the money brought back wasn’t invested in research but was paid out as dividends. Instead, there has been bipartisan interest in deemed repatriation, where accumulated foreign earnings are taxed at a discounted rate. Proposals for deemed repatriation rates have typically fallen between 8 percent and 15 percent.

In 2004, Pfizer repatriated more earnings than any other corporation, Willens said. And today, repatriation is likely one of the main reasons the company is pressing the pause button on big mergers or acquisitions, he said.

In 2016, Pfizer and Allergan Plc, an Ireland-based pharmaceutical company, were forced to scrap a merger deal as a result of Obama-era regulations aimed at curbing corporate inversions. “Pfizer’s primary reason for doing the deal was not to lower its cash tax rate, which is already quite low, but to position itself to repatriate its foreign earnings without the imposition of U.S. taxes,” Willens said. “They were going to accomplish that feat through a technique called ‘hopscotch’ lending, which the acquisition of Pfizer by Allergan plc, a foreign corporation, would have made possible,” he said.

Repatriation Holiday?

Assuming the company’s overriding goal is to gain access—without undue cost—to its copious foreign earnings pool, Pfizer has to see what sort of tax reform proposals are enacted, if any, Willens said, adding that at last count, the company had more than $140 billion of such earnings. It will want to wait to see if there’s another repatriation holiday or if the U.S. decides to implement a territorial tax system, which allows for the tax-free repatriation of foreign earnings, he said.

“If Pfizer’s principal reason for undertaking a cross border merger is to ‘liberate’ its foreign earnings, and tax reform will make that job much easier, then why go through the expense and headaches of a merger,” Willens said.

Butler said the repatriation issue—like lower tax rates—speaks to the company’s desire to maximize shareholder value. “What a lot of multinationals think about every day is the inability to access their capital without being double taxed,” he said.

To contact the reporter on this story: Allyson Versprille in Washington at aversprille@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

For More Information

Text of the Pfizer earnings call transcript is at http://src.bna.com/rig.

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