Pfizer announced today its decision to acquire Allergan in a $160 billion deal. This is the largest deal in a long list of healthcare deals that have been closed in recent years. The healthcare industry has made moves to consolidate, especially among smaller-cap companies, but this deal shows that even large-cap companies are participating in this trend as well. Not only does this deal add to the list of healthcare deals, it also adds to the growing list of inversion deals. Inversion deals are mergers where a U.S.-based company will acquire a company based in a foreign country in order to reincorporate overseas to take advantage of lower tax rates. By doing so, Pfizer expects to decrease its corporate tax rate from approximately 25% to 17%. For a company that generates billions in pre-tax income, this 8% savings represents a substantial increase in net income. Allergan, based in Ireland, will legally become the parent company, but Pfizer will technically be the lead company post-merger. The transaction price represents a 30% premium to Allergan's share price before rumors of a potential merger emerged and were priced into Allergan's stock price.
The combined company, called Pfizer Plc, will be able to recognize significant cost synergies equalling $2 billion within three years after the deal closes. Together, the two multi-billion dollar companies will sell over $60 billion worth of pharmaceutical products every year. Despite recent outrage and criticism over large pharmaceutical companies acquiring smaller ones and spiking up prices on their products, this pricing strategy is not expected to be a concern as the two companies expect to achieve accretion through cost savings and tax savings rather than demanding price premiums on specialty pharmaceutical products.