The U.S. Treasury Department proposed new tax regulations late on Monday threw a series of proposed mergers into question, including Pfizer Inc's (NYSE:PFE) $160 billion agreement to buy Allergan Plc (NYSE:AGN), causing Allergan shares to fall sharply.
Pfizer's deal to buy Dublin-based Allergan, the maker of Botox, aimed to create the world's largest drugmaker and was conceived under U.S. tax rules that allow the company to move its headquarters to Ireland and lower its tax rate.
U.S. President Barack Obama has said such deals, called tax inversions, are unpatriotic and the U.S. government has been trying to stop them. Late on Monday, the Treasury Department introduced a regulation that would negate the benefits of these inversions, putting Pfizer's acquisition of Allergan at risk.
Allergan shares were trading down 15.3 percent at $235 on the New York Stock Exchange. Pfizer shares rose 1.6 percent to $31.20.
“By how the stocks are trading, the market thinks the deal is almost dead,” said Les Funtleyder, healthcare portfolio manager at E Squared Asset Management in New York, whose firm holds Pfizer shares.
On Monday night, the companies said in a joint statement that they were reviewing the notice and declined to speculate on whether the deal would go forward.
There has been no decision yet on whether or not the terms of the Pfizer-Allergan deal will change, one source familiar with the situation said.
Pfizer and Allergan do not see an easy way out because changing the terms of the deal may result in more changes to the law, the source said.
Pfizer had planned to make a decision by 2016 whether to split off its generics, but delayed the decision until 2019 after announcing its merger with Allergan. Conover said the decision could be moved to late 2017 or 2018.
The federal government has grappled with a wave of inversions in recent years as U.S. companies have sought to slash their tax bills by redomiciling overseas, although their core operations and management usually remain in the United States even as they claim a new tax home.
Several U.S. presidential candidates, including Republican Donald Trump and Democrat Hillary Clinton, have seized on the issue in their campaigns.
Obama, a Democrat, has called repeatedly for action by the Republican-controlled U.S. Congress on inversions, but lawmakers have done little. He repeated his appeal to Congress on Monday and said he welcomed the Treasury's action.
"To us, whether Pfizer and Allergan stay committed will be known shortly - more important for many is if the deal breaks, where should Allergan trade?" Wells Fargo analyst David Maris wrote in a research note on Tuesday morning.