Wednesday, April 30, 2014

So. . . Pfizer's Ian Read Is. . . Wesley Snipes?! [A US Tax Protestor?]

Okay. Caveats, first: These are only my opinions. Opinions. I am not urging anyone to buy or sell any specific equity. Nor am I soliciting proxy votes, on either side (so no SEC Schedule 14 solicitation materials will be filed by me -- today. Hah!). Finally, I am no takeover tax law specialist.

But I am pretty well-versed in how larger M&A deals, friendly and hostile, inside and outside of life sciences generally play out. And so -- punchline next: either Pfizer is about to radically break the mold, or perhaps -- perhaps -- this is simply Mr. Read's very showy way of making a tax protest. And he is able to destabilize and/or mess with a smaller childhood competitor in the process. "What's not to like," from his Machiavellian point of view? Read on. . . for the details.

From the beginning of this iteration of his Pfizer chairmanship, Mr. Read has complained about Pfizer's US tax rates. [Mr. Kindler (a lawyer, and his immediate predecessor) -- mostly just paid Pfizer's US fair share, and went about his job.] Mr. Read is plainly frustrated with the inaction in Congress -- on overhauling corporate tax schemes. And there clearly is wood to chop, here. America could be more competitive on its corporate income tax rates -- and in the same stroke, abolish a lot of the below gaming of the system, by people like Mr. Read.

He's a Briton -- and yesterday, while I was busy with far more pleasurable company -- he flew to London to essentially threaten the British government to stay out of "his" merger business. His hostile takeover business, actually. Ahem. Hostile "British job slashing takeover business," actually -- all the truths told.

That's cheeky, indeed -- even for a man with Mr. Read's estimable ego.

But be that as it may (and the British Lords will weigh in on his proxy fight ideas -- and the anti-competitive nature of it all), I am beginning to think it is all. . . a convoluted ruse. A ruse, to prod Congress to reform tax rates. Mr. Read (using his own captialist's bully pulpit) is trying to (1) destabilze a British competitor -- AstraZeneca, and in one fell move -- also (2) create a sharpened sense -- in the sphere of US public policy debate -- that US tax rates are too high. Said another way, I now doubt he has any real abiding intention to actually close a perhaps $120 billion, leveraged, hostile proxy battled AstraZeneca wipeout. I think he is trying to prod Congress into action, that's all. [I know he'd rather not spend his time declaring the end of his fellow Britons' careers -- and there will be thousands of those decisions, should the deal close.]

Why do I believe he is running a ruse? Well, because his own math doesn't work. Not under the current IRS § 7874(a)(2)(B) rules. He has very publicly stated he intends to acheive an inversion with this deal. By that he means he will avoid IRS § 7874(a)(2)(B), and effectively make Pfizer a British-only domiciled tax-payer, by having AZ nominally acquire Pfizer, and the resulting entity be. . . British. And thus pay home taxes to the United Kingdom -- at a far lower rate, if all goes without a hitch. But there is a hitch -- a math problem.

The mathematical problem is that now that AZ has rebuffed him, he will almost certainly have to increase the size of his offer to win the likely coming proxy battle, with confidence -- and he will without any doubt -- have to offer a greater proportion of cash. Not Pfizer stock -- to get the deal done. That's the way hostile deals work. The target's board -- here AZ -- may simply say "no," until a nearly all-cash topping offer is made. Then it will need to negotiate in earnest. But today's offer (from January 2014, actually). . . isn't that day -- it is only 30 per cent cash.

And to avoid the anti-inversion rules of the US IRS under § 7874, he must ensure that less than 80 per cent of all the former Pfizer shareholders will control the new post-acquisition (British) combined entity. Well -- if he pays mostly cash, he can't get there. [Truthfully there are lots of ways to "get there" -- but they all generally require a friendly target's cooperation.] Let's call Pfizer's current market capitalization as $200 billion -- give or take. So, at least $40 billion (to greatly over-simplify the tax analysis here) of Pfizer securities must leave the hands of Pfizer's shareholders, and reside in the hands of former AZ holders -- at the close of the likely proxy battle. If he is only offering $100 billion, that means his Pfizer offer will be less than 50 percent cash to AZ -- to meet the US IRS inversion rules. The board of AZ is (as I say) likely to say "no" (and is lawfully permitted to do so) -- if such a large portion of Pfizer stock is to be injected into the former AZ holders' risk profile, on the transaction. Afterall, Pfizer stock is likely to decline on the NYSE during the proxy battle -- due to the uncertainties surrounding whether the deal can get closed. So, Mr. Read's current structure is "Rock -- meet Hard Place." That is, there is no math. Not if he wants to avoid the anti-inversion rules. He needs a friendly deal. And he doesn't have one.

I've not even begun to talk about the antitrust impediments to getting the deal closed. And they are manifold. We will come to those, if there is an increased offer from Mr. Read's side of the table. But I suspect this is a straw man transaction -- to goad the US tax policy debate. He is. . . grandiose like that. Just my opinion.

But he is toying with thousands of peoples' lives -- and careers -- and is using his stewardship of a $200 billion public company to manipulatively remake US tax policy?! Seriously? That is unfortunate.

Finally, and generally off topic: sweet Shiva -- may we please please please, once and for all -- "stop tinkering with the machinery of death"? [Bonus points for anyone who can identify the Justice who coined that now-immortal turn of phrase.] Yes, I have been a life long death penalty opponent. If that link doesn't convince you that it is both "cruel and unusual," I am at a loss -- a loss to explain why we are any better, any different -- than the perp himself.


Anonymous said...

Good points. This may be plan B after the alleged tax repatriation holiday lobbying did not work. Whether the AZ deal goes through or not Congress may be spooked to lower tax rates. PFE then repatriates the cash back to the US and makes an offer for BMS.

Condor said...

Right. You are spot on here!

Namaste -- and do stop back.

Love my readership!

Anonymous said...

Could it be that he has more inside knowledge of a potential pipeline?

And didn't Pfizer license the anti-CLTA4 antibody to AZ/Medi for development?

Pfizer also has one of AZ/Medi previous VPs of research as one of their own VPs.

Just saying~~~