TO INVERT OR NOT TO INVERT? THE PFIZER ALLERGAN...

TOINVERTORNOTTOINVERT?THEPFIZERALLERGANDEAL

Deathandtaxes..

2

ThePfizerAllerganDeal:Background

¨  Pfizerhasbeensearchingforadealpartnerforawhile.ItsaKempttoacquireAstraZenecaendedlastyear,whentheUStaxlawoninversionswasSghtened.

¨  Inthelastfewweeks,though,PfizerhastargetedAllerganforanacquisiSonandthedealseemstobetakingform,combiningthesecondlargestpharmaceuScalcompanyintheworld(Pfizer)withthefiVhlargest(Allergan).

¨  Whiletherehasbeendesultorytalkaboutsynergy,thedealseemstobemoSvatedbytwofactors:¤  Buyinggrowth:Pfizerhasseenrevenuesdropoverthelastfiveyears

andisdesperateforgrowthandAllerganhashadhealthygrowthoverthethesameperiod.

¤  Taxsavings:AllerganisanIrishcompanyandthecombinedcompanywillhaveIrishroots,allowingPfizertoleaveitsUStaxjurisdicSon.

3

TheGrowthMoSve

32.26%

-6.34%

-10.45%

-5.62%-3.84% -3.39%

27.71% 28.53% 29.02%

46.71%

50.53% 50.15%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

$-

$10,000.00

$20,000.00

$30,000.00

$40,000.00

$50,000.00

$60,000.00

$70,000.00

2010 2011 2012 2013 2014 LTM(2015)

AnnualRevenueGrowthRate

Revenues(inmilliions)

PfizerversusAllergan:DivergingGrowthPaths- 2010to2015

PfizerRevenues AllerganRevenues PfizerRevenueGrowth AllerganRevenueGrowth

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Atwhatcost?

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TheTaxMoSve

¨  PfizerhasbeensurprisinglyopenaboutitstaxmoSves,withCEOIanReadarguingthattheUStaxcodeputsPfizeratataxdisadvantageglobally.

¨  EvenifitwerenotvocalaboutthetaxmoSve,itsacSonsoverthelastcoupleofyears,whereithastargetedanumberofotherdrugcompaniesfordeals,withtheonlycommonthreadbeingthattheirwereallifforeignlocales,suggeststhattaxesarefrontandcenterinthisdealaswell.

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TheUSTaxCode’sTrifecta

¨  HighMarginalTaxrate:TheUSnowhasthehighestmarginalcorporatetaxrateintheworldat40%.

¨  Globaltaxmodel:TheUSisoneofsixcountriesintheworldthattaxesitscorporaSonsontheirglobalincomeattheUStaxrate.

¨  TheRepatriaSonTrigger:TheforeignincomeisnottaxedatthedifferenSalrate(betweentheUSandtheforeigndomicile)unSltheincomeisrepatriated.

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ThePayofftoInverSng

¨  ForeignincomeisnottaxedatthedifferenSalrate:OnceacompanymovesfromaUStaxdomiciletoanon-USone,foreignincomegetstaxedattheforeigntaxrate,butthereisnodifferenSaltax.

¨  Trappedcashisimmediatelyuntrapped:Theaccumulatedcashinforeignmarketsisuntrappedandcanbeusedforanypurpose.

ImplicaSon:Companiesthatareprofitableandhaveasignificantpropor5onoftheirrevenuesfromnon-USmarketswillgainthemostfrominversions.

8

ThePfizerCase

9

ThreeTaxScenariosforPfizer

10

Andthevalueundereachone..

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AgooddealforPfizerstockholders?

¨  ThevaluecreatedbyinverSngis$27.15billion,butitreflectstheassumpSonthatUStaxcodewillnotchange.IfyouassumethatthepoliSciansonbothsidesoftheaislemeanwhattheysayandthatthetaxlawwillchange(lowertaxrate,removeglobaltaxfeature),thevaluecreatedbyinverSngwilldecline.

¨  Therearetwocoststoconsider:¤  Thechangeintaxlawslastyear,designedtomakeinversionsmoreinfrequent,will

addtothecostofthisdeal.¤  Theremaybeabacklash,wherePfizer’sproductsmayberestrictedintheUS

markets.¨  Evenifthesecostsareminimal,thedealwillcreatevalueonlyifthe

premiumthatPfizerpaysforAllerganislessthanthevalueaddedfromshiVingtaxstatusandalloftheotherbenefits(synergy,growthetc.).Attherumored30%premium(about$30billion+),thisisabaddeal.Allerganisthewrongtarget,atthewrongpriceandatthewrongSme.

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AMoralorEconomicArgument?

¨  IfthevaluecreatedbyinverSngyourbusinessexceedsthecost,andyoufeelopposedformoralorpatrioScreasons,youarefacedwithachoice.¤  Ifyouownthebusiness,youarewellwithinyourrightstostayaUScompanyand

paytheUStaxrate.ItsyourbusinessandyoucanbeaspatrioScandmoralasyouwanttobe.

¤  Ifyouarethemanagementofapubliclytradedcompany,youhaveafiduciaryresponsibilitytoyourstockholderstomaximizevalue.RememberthatmanyofyourshareholdersarenotUSciSzensanditisnotclearthattheyshareyourpatrioSczeal,andthatquiteafewofthemwilldisagreewithyourargumentsthat“maximizingtaxespaidtothegovernment”ismorallyright.

¨  TheboKomlineisthatataxcodethatconstantlytestsindividualsandcompaniesontheirpatrioSsmandmoralitywillfailanddeliverwhattheUStaxcodedoes:asystemthatisinefficientatcollecSngtaxesandthatencouragescompaniestotakeperverse(andcostly)acSonsintheirpursuitoflowertaxes.