AstraZeneca, Shire Slump As U.S. Shuts Tax Loopholes

Share prices of AstraZeneca plc (ADR) (NYSE:AZN) (LON:AZN), Shire PLC (ADR) (NASDAQ:SHPG) (LON:SHP) and other drug makers fell today after the U.S. Treasury moved to block tax inversion deals. Tax inversion mergers have become popular in the U.S. corporate sector as they allow companies to avoid paying higher taxes in the U.S. by reincorporating in a country with a lower tax rate.

Pharmaceutical deals in jeopardy

Reuters reports that the deal between AbbVie Inc (NYSE:ABBV) and Shire may not happen if AbbVie could not perform a tax inversion by acquiring Shire. Shares of AbbVie also slumped by as much as 2% in regular trading today.

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Another potential deal that may be affected is Pfizer Inc. (NYSE:PFE)’s pursuit of AstraZeneca. Pfizer hasn’t made another offer since its $118 billion offer fell through in May.

Clamping down on tax dodging

Investors had already been expecting the White House to look for ways to keep corporations from completing deals for the purpose of tax inversions. However, Deutsche Bank analysts said the plans officials announced on Monday were even broad than they had expected.

The new rules become effective immediately, and they make it more difficult to complete tax inversion deals. They also reduce the potential rewards that were previously associated with these kinds of deals. It’s unclear at this time, however, whether the new rules will derail deals that are already on the table.

What impact on mergers?

Some analysts believe Pfizer will not make another bid for AstraZeneca toward the end of November because of the new rules. That’s when the drug maker will be eligible to make another offer because it will mark the end of the U.K.’s required six-month cooling off period.

Others think the new rules will not have much of an impact on a potential deal between AstraZeneca and Pfizer. Some expect Pfizer to still return with another bid for AstraZeneca after the deadline, which is Nov. 26.

It is possible that the deal between Shire and AbbVie will still move forward, however, because it is already in progress. Unfortunately for AbbVie, it will probably lose out on the previously expected tax savings from the deal. The two companies are expected to close the deal in the December quarter.