When it was announced, investors celebrated the announcement that US pharmaceutical giant, AbbVie was making a £32bn takeover offer for Shire (LSE: SHP) (NASDAQ: SHPG.US).
However, as the dust settles there is a growing amount of speculation that the US government could move to block the merger due to tax implications. Unfortunately, a move of this kind would also eliminate the possibility of Pfizer making another offer for AstraZeneca (LSE: AZN) (NYSE: AZN.US).
A taxing problem 
The US government is worried that AbbVie’s takeover of Shire is motivated by the tax savings to be had from the deal. Indeed, AbbVie has announced that it will shift its tax base to the UK after merging with Shire, in order to lower the company’s corporate tax bill.
This process of shifting the company’s tax residence is known as inversion. Pfizer’s attempt to acquire Astra was also motivated by inversion potential.
Now, lawmakers within the US are trying to stop inversions and this movement is being led by President Obama and US Treasury Secretary, Jack Lew. In particular, the President has stated that he will seek to counter inversion strategies aggressively, a statement which sent shivers throughout both Wall Street and the City of London.
Counter attack
According to some sources, US Treasury Department officials are currently putting together a list of options the department can take in order to stop inversions.
The Treasury has warned that it is able to use a broad range of authorities for possible administrative action to deter companies from using cross-border deals to escape US taxes. It’s now just a matter of discovering the most effective method for blocking these deals.
So, there is now a very real threat the deal between AbbVie and Shire could be blocked by laws designed to block inversion deals. With Shire’s shares currently trading below AbbVie’s offer of £52.48 a share in cash and stock, it seems as if the City does not believe that the deal will go ahead in its current form.
What’s more, if the US does introduce hefty penalties for inversion deals, it is likely that a deal between Pfizer and Astra will no longer be on the table. Indeed, one of Astra’s most attractive qualities was the company’s low tax rate, which Pfizer wanted to take advantage of.
What to do?
If US lawmakers do go ahead and block inversions, it’s likely that the Shire-AbbVie deal will fall apart and Shire’s share price will collapse as a result. Further, Astra is likely to see its share price fall back to where it was before Pfizer’s interest in the company was revealed, around £39 per share.
But investors shouldn’t be worried as while big pharma companies thrash out billion dollar deals, back in the real world the UK’s economy is roaring back to life and so is the stock market.
