When I contemplate the spectacle of a New York City company combining with a company based in Parsippany, N.J., to form a company based in Ireland, I can’t decide whether to laugh or rant. So I will do a little of both.
Polite people call this a corporate inversion — but I call it desertion. Pfizer wants to keep all the benefits of being in the United States — our rule of law, deep financial markets, great places for employees to live, first-rate education systems — without having to pay for them.
I love that two years ago, when the company now known as Allergan did its desertion deal and became Irish, then-chief executive Paul M. Bisaro talked about why the company’s top executives were not moving to Europe. “Everybody loves New Jersey too much, so nobody is willing to go,” Bisaro said in a conference call.
Despite claims by Pfizer chief executive Ian C. Read that Pfizer needs to desert to be able to spend more money on research and development, it’s clear that the main motivation is something else. To wit: Financial engineering and reducing tax payments are a quicker and simpler way to higher profits than trying to develop the next best-selling drug, such as Viagra or Eliquis.
I would give you Pfizer’s side of this, but the company ignored my request for comment.
This proposed transaction seems to be at least the fourth time in the past two years that Pfizer has tried to reduce its taxes by buying a non-U.S. company and adopting its target’s corporate domicile.
It missed on London-based AstraZeneca last year, because AZ opposed the bid. Pfizer also reportedly made passes last year at British-based GlaxoSmithKline and at what is now Irish-based Allergan but was then called Actavis.
It looks to me like the fourth time will be the charm.
Unlike Pfizer’s previous attempts to desert the country, this deal is attracting political attention. Presidential candidates are holding forth, with the likes of Donald Trump (in favor) and Hillary Rodham Clinton (against) spinning their version of what this proposed deal is about.
But I don’t think any of the political uproar, even should it continue, would impede the deal. And there’s certainly no sign that Congress, which could adopt legislation that would stop the deal by changing Section 7874 of the tax code, is going to do anything.
Should this transaction go as I expect it to, it not only will be the biggest desertion in history but also will probably be more costly to U.S. taxpayers than previous ones have been. That’s because I expect the deal to be structured to give Allergan shareholders a stake of between 40 and 50 percent of the new Pfizer PLC. That level of ownership by former Allergan holders would allow Pfizer PLC to play far more tax games than a regular deserting company (in which the foreign company’s shareholders own more than 20 percent but less than 40 percent) can manage. (Ask the tax techie of your choice for details.)
This deal, should it happen, would also mark the first time that the Dow Jones industrial average, the quintessential American stock indicator, will include a foreign company.
I’ll spare you the various ways that our country can deal with the desertion problem by fixing our tax code as a carrot, and adopting various penalties for deserters (such as limiting their ability to do business with the federal government) as sticks. We don’t have the space to deal with that today.
For the record: Yes, I know — and have written numerous times — that inverting companies aren’t breaking the law. But just because something is not illegal does not make it right.
And it does not make it in the interest — make that the long-term interest — of deserting firms’ shareholders, either. Why? Because almost all these companies do more business in the United States than in any other country, and lowering federal and state governments’ tax revenue while continuing to consume the same amount of goods and services undermines our national and local economies — and ultimately undermines the companies’ U.S. business.
Finally: When companies desert, we have to increase taxes to replace what they no longer pay, or we have to cut services, or we have to increase borrowing. In other words, someone is picking up the tab for these deserters. Look in the mirror, and you will see who it is.