Big-time Pfizer ($PFE) investors are no doubt prepared for the tax hit from its forthcoming merger with Allergan ($ACT). But smaller shareholders, including current and retired employees, could face tax liabilities they're not ready for.
As The Day reports, some older retirees who've held onto their shares for decades face major tax bills from the deal, some in the seven figures. High-bracket taxpayers would be on the hook for 20% in capital gains, and with state and other federal taxes, the hit could be 30% or more, financial advisers tell the newspaper.
The Allergan deal allows Pfizer to "invert" its headquarters to Ireland, a more tax-friendly country. To follow the rules for such deals, it's structured as a "reverse merger," and that means it's Pfizer stockholders who'll be trading out their shares.
"It's going to be a tax nightmare," retired Pfizer executive Tom Althuis of Groton told The Day. "It's a substantial bite."
Pfizer will be buying back shares--up to $12 billion worth--to help stockholders who need cash to help cover their taxes. And the company says that the merger's "strategic benefits" will be beneficial to shareholders--beneficial enough "to outweigh the tax implications."
It's the employee and retiree shareholders who've been most loyal who will suffer the most, like one shareholder who's 80-years-old and has held onto his shares for decades. He faces a tax bite of up to 7 figures, his financial adviser said. Newer employees who've held their shares for years rather than decades have hung on through a period of little stock appreciation, so their gains--and thus their taxes--will be less significant.
After fielding repeated inquiries about the tax consequences of the deal, one Mystic, CT, broker is holding a special presentation later this month. The event will look at the tax liabilities but also at Pfizer's business prospects after the merger, The Day says.Pfizer CEO Ian Read
Will Pfizer execs face their own tax bills? With $8.3 million worth of Pfizer shares as of last fall, CEO Ian Read could be on the hook for $1 million, The Day says. In other inversion deals, such as Mylan's ($MYL) move to Ireland via its Abbott Laboratories ($ABT) portfolio purchase, the company paid out $32.5 million ahead of time to top managers to avoid excise taxes designed to deter inversion moves, and another $20.5 million to help cover their tax bills. Actavis--now Allergan--gave then-CEO Paul Bisaro more than $40 million to cover the excise taxes stemming from its Warner Chilcott purchase. But Pfizer spokeswoman Joan Campion has repeatedly promised that her company doesn't plan to pay for its executives' taxes.
Pfizer's tax inversion plans have drawn plenty of criticism from U.S. politicians and even some high-profile investors; activist Carl Icahn called it a "travesty," and presidential candidate Hillary Clinton proposed new tax rules to quell similar deals. President Obama called Pfizer disloyal to the U.S. for its tax-avoidance plans. But executives of Pfizer and Allergan don't expect a Treasury Department crackdown to interfere with their plans to close by year's end.
- read The Day story
Special Reports: The top 15 pharma companies by 2014 revenue - Pfizer | Pharma's top 10 M&A deals of 2014- Actavis/Allergan - Actavis/Forest Laboratories