The saga of the recent attempted takeover of British AstraZeneca by American rival Pfizer kept industry participants glued to their seats with each twist and turn. Over the course of a month, Pfizer tried again and again and ultimately failed to secure a deal, despite its final offer valuing AstraZeneca at £69bn. After this final bid failed, international rules for the takeover of public companies came into effect, dictating that Pfizer must wait at least another six months before attempting to rekindle negotiations.
Pfizer’s pursuit of AstraZeneca was significant for more than just the stratospheric financial values involved; it was a high-profile sign of an important shift in the market. This was a so-called inversion deal, in which Pfizer would acquire AstraZeneca in order to move its operations to a more competitive tax environment on the other side of the Atlantic. Over the past two years, a number of American pharmaceutical companies have secured inversion deals with European drug manufacturers, particularly in Ireland, as they seek more favourable tax rates (see Fig. 1). The result has been that, as with the attempted AstraZeneca deal, premiums for companies residing in these coveted tax environments have gone through the roof.
Inversion deals are fast becoming a stalwart of the mergers and acquisitions market, highlighting the important role governments play in the establishment of tax environments.
Since the huge amount of publicity generated by the Pfizer bid, US lawmakers are taking aim at this kind of merger in order to protect the country’s corporate tax revenues. But this is precisely the sort of deal that the UK Government has been hankering for: a repatriation of funds that would boost tax receipts. In fact, UK Chancellor of the Exchequer, George Osborne, devised the current tax scheme and policies with this specific sort of deal in mind.
As the world becomes more globalised, it is natural that companies will seek out better deals abroad. The risk governments face is that of a race to the bottom when it comes to corporate tax rates.
Pfizer’s bid for AstraZeneca has brought into the spotlight a number of important questions about the role governments play in attracting foreign companies to their shores, but also to what extent they should intervene when a takeover might not be in the public interest, irrespective of, for example, tax revenue.
In the UK, the coalition government was reluctant to get involved, despite significant political pressure from the opposition, but in France that would not have been the case. In fact, only weeks before the AstraZeneca/Pfizer ordeal hit the papers, the French Government enthusiastically threw itself into negotiations for the takeover of Alstom’s energy arm as General Electric, from the US, and Siemens, from Germany, went head-to-head in an attempt to takeover the company. Despite Alstom’s board clearly favouring General Electric’s bid, the government actually changed legislation in order to tilt the scales in favour of Siemens.
The role governments play in cross-border mergers and acquisitions is often downplayed as the spotlight shines on the more titillating aspects of a deal. But over the past few years a significant number of deals have been boosted or scrapped after officials got involved – for better or for worse.
In 2014 alone, $300.5bn worth of acquisition bids have been rejected or pulled, close to double the figure for the same period in 2013, and the highest since 2008, according to research by Dealogic (see Fig. 2), suggesting perhaps that industry leaders need to reassess their approach to cross-border mergers and acquisitions.
Pfizer tries to take over AstraZeneca
Though the attempted deal dominated headlines in the business pages for most of May, it had been in the works since late 2013. As early as January 2014, AstraZeneca had already refused to enter talks on the back of a proposed sale at £58bn. At the end of April, however, Pfizer’s interest had not waned and it went public with its interest in the British counterpart, and made no secret of the fact that it was looking to shield its non-US earnings from US taxes.
Because the British government had been very public in its campaign to attract foreign companies by creating a more welcoming tax environment, Pfizer’s CEO Ian Read wrote a letter to Prime Minister David Cameron assuring him Pfizer would base its operations in the UK, and guaranteeing 20 percent of the merged company’s research and development capabilities would be based in AstraZeneca’s Cambridge facility for at least five years.
By including the prime minister in negotiations, Pfizer was hoping for a spot of governmental pressure to ensure the deal went through. It might have got more than it bargained for when the leader of the opposition Labour Party, Ed Miliband, waded into the debate by accusing Cameron of “cheerleading” for a foreign company, at the expense of British jobs and the wellbeing of British industry. Suddenly the deal was being debated on the front page of every newspaper, and Pfizer was losing support. The heads of both companies ended up being hauled in front of a parliamentary committee to thrash out the deal, which by now was being presented as the pinnacle of British national interest.
In the end, despite raising bids and many reassurances, the public backlash against the deal provided the AstraZeneca board the confidence it needed to hold its ground, and demand a better deal or no deal. Pfizer lost out as the deadline for an agreement expired, but AstraZeneca shares plummeted in the weeks following the collapse of the deal. According to industry researcher Dealogic, the Pfizer/AstraZeneca deal was the second-largest bid ever to fail, after BH Billiton’s attempted takeover of Rio Tinto in 2008.
Horizon Pharma takes over Vidara Therapeutics
Horizon Pharma has grown into one of the most productive independent pharma companies in the US, but once its deal with Vidara Therapeutics is finalised over the summer, it will no longer bear an American postcode. The arrangement is curious. The new Horizon Pharma PLC will primarily market its four products in the US, but it will be based – and taxed – in Ireland, home of the soon-to-be defunct Vidara.
Though Vidara’s portfolio consists only of Actimmune, a bioengineered protein used to treat granulomatous disease and osteopetrosis, Horizon has shelled out around $660m to incorporate it, $200m of which will be paid in cash. For Vidara, a single-product privately held company, it is a good deal. However, it has since become clear that Horizon’s takeover was more of an inversion deal than anything else. By acquiring Vidara, Horizon has secured the right to base its operations in the extremely favourable tax climate of Ireland. Horizon has maintained that its interest in Vidara was purely motivated by Actimmune.
The Wall Street Journal has quoted an anonymous person close to the deal as saying that should Vidara have been based in the US, it’s price tag would have read something between $300m and $400m. Few countries are as welcoming of foreign takeovers as Ireland, which has carefully crafted generous tax provisions corporations looking to settle on its shores. The savings Horizon will make in tax payments by relocating to Ireland more than make up for the additional $260m it is paying for Vidara to begin with.
As well as Horizon, a number of other medium-sized American pharma companies have made the move across the Atlantic to the Emerald Isle. Actavis bought out Warner Chilcott last year for a 34 percent premium to the value of the stock, but revealed soon afterwards that its effective tax rate would drop from the 28 percent paid in New Jersey to around 17 percent in Ireland.
Deutsche Boerse fails to merge with NYSE Euronext
Plans were well advanced between NYSE Euronext and Deutsche Boerse to merge into the world’s biggest exchange in 2012, before EU governing bodies intervened to put a stop to it. Deutsche Boerse was set to take over NYSE Euronext for $9.5bn, and the new merged company would have had an outright monopoly in European exchange-traded derivatives.
In the final moments, the European Commission intervened and stopped the takeover, claiming that the benefits would not be enough to outweigh the “harm caused to customers by the merger,” according to an EC statement on the matter. The two companies had appealed directly to EC president Jose Manuel Barroso in a last-ditch attempt to salvage the deal, but to no avail.
“This is a black day for Europe and its future competitiveness on global financial markets,” said Deutsche Boerse in a statement. “The decision is based on an unrealistically narrow definition of the market that does no justice to the global nature of competition in a market for derivatives. We therefore regard this decision as wrong.” Though both companies considered an appeal with the EU courts, in the end, they parted ways and pursued individual strategies.
The decision to disallow the merger was momentous at the time, as EU markets were failing and market participants had long been calling for a consolidation of the industry. Though the NYSE Euronext and the Deutsche Boerse are based on opposite sides of the Atlantic, they remain each other’s closest competitors, so it seems unlikely that the EU would ever have permitted such a merger. Joaquin Almunia, the EU’s Antitrust Chief, and Barroso have a long history of ruling against mergers like this one, which would clearly create what they perceive as straightforward monopolies.
Almunia said the deal was blocked “to protect the European economy from the perverse effect of a combination that would have practically eliminated effective competition in the market.” However, it could just as easily be argued that Almunia and Barroso’s trigger happy response to shooting down potential cross border take-overs may actually do more harm to the European markets, which have been stale and sluggish since the financial crisis broke half a decade ago.
Pfizer’s failed bid for AstraZeneca
Deutsche Boerse’s blocked bid for NYSE Euronext
Attempted takeover of Alstom Energy by General Electric
Though Schenectady, New York-based General Electric has not been entirely excluded from negotiations with Alstom’s energy arm in France yet, the local government has taken aggressive steps to prevent any takeover by GE from happening. In yet another act of unabashed protectionism, François Hollande’s government has given itself the power to veto or block foreign investment in key industries such as energy. Though it is an extension of a previous piece of legislation passed in 2005, few doubt the motives behind the timely amendment and the vital powers it gives Hollande.
The French government has made no secret of its distaste for GE’s proposed takeover of Alstom’s energy operations, and has openly favoured Germany-based Siemens’ proposed bid, in an attempt to keep control of the company within the EU. Alstom’s board has openly backed GE’s proposed takeover, but Hollande himself has deemed the terms of the agreement “unacceptable” as they fail to provide sufficient protection for French workers. “It is for the government to ensure that its legitimate objectives are fully taken into account by foreign investors, whether from within the European Union or other countries,” Minister for the Economy and Industry Arnaud Montebourg said in a statement. “This new power will naturally be applied in a selective and proportionate manner.”
GE has openly stated that it will protect French jobs and open new sites in the country but there are fears that the rail section of Alstom’s business might not be able to stand alone after the energy business is sold off. Alstom is one of France’s most traditional companies, and as well as its more profitable energy arm, it runs the country’s iconic TGV rail service. Alstom and TGV were bailed out by the government only 10 years ago, and might not be strong enough independently.
France is also a powerhouse in the global energy market, and the government is fearful that a takeover by a foreign company could harm its standing in the industry. It is understood that Siemens’ proposal would ring-fence Alstom’s steam turbine used in nuclear plants, thus protecting France’s exports in the atomic power market.
The power grab by the French government could be setting a dangerous precedent for cross-border takeovers in France, and Europe as a whole, and it is especially troubling when taken alongside the European Commission’s tough stance on antitrust legislation. It could put the future of cross border takeovers into Europe is in jeopardy.