The U.S. Treasury Department’s proposed new tax regulations threw a series of proposed mergers into question, including Pfizer Inc’s $160 billion agreement to buy Allergan Plc, pushing shares of Allergan and other targets lower.
Other deals that could be affected by the new Treasury tax rules include the proposed $16.5 billion merger of Johnson Controls Inc, a U.S. maker of car batteries and heating and ventilation equipment, with Ireland-based Tyco International Plc.
Shares of U.S.-based Waste Connections Inc were down 6.6 percent. It said in January it would buy Canada’s Progressive Waste Solutions Ltd for about $2.67 billion in a tax inversion.
Among those deals, Pfizer’s plan to buy Dublin-based Allergan, the maker of Botox, move its headquarters to Ireland and lower its tax rate, was the largest. Pfizer announced the deal in November, saying it would save $2 billion in costs.
On Monday night, Pfizer and Allergan said in a joint statement that they were reviewing the notice and declined to speculate on whether the deal would go forward.
Allergan shares were down 15.5 percent at $234.50 on the New York Stock Exchange. With more than 21 million U.S.-listed shares traded, it was the busiest trading day in company history.
Pfizer shares rose 1.9 percent to $31.30. Tyco shares were down 2.3 percent.
President Barack Obama has said tax inversions are unpatriotic and the U.S. government has been trying to stop them. Late on Monday, the Treasury Department introduced a regulation that would negate the benefits of these inversions, putting Pfizer’s acquisition of Allergan at risk.
Les Funtleyder, healthcare portfolio manager at E Squared Asset Management in New York, whose firm holds Pfizer shares, said it looked like most investors expected Pfizer to move on.
“By how the stocks are trading, the market thinks the deal is almost dead,” he said.
Pfizer is likely trying to figure out if there is a way around the new rules and if it cannot dodge the rules, will move on, said Raghuram Selvaraju, managing director of brokerage H.C. Wainwright.
If it does not acquire Allergan’s new, fast-growing medicines, Pfizer will need to look for other companies with attractive products, such as U.S. drugmakers Biogen Inc , Regeneron Pharmaceuticals Inc and AbbVie Inc , Selvaraju said.
There has been no decision yet on whether or not the terms of the Pfizer-Allergan deal will change, one source familiar with the situation said.
Pfizer and Allergan do not see an easy way out because changing the terms of the deal may result in more changes to the law, the source said.
Morningstar analyst Damien Conover, who predicted Pfizer and Allergan will make an announcement about the deal within days, said that if the deal collapses, Pfizer will likely move up its decision on a key business strategy – whether to sell or spin off its hundreds of generic medicines.
Pfizer had planned to make a decision by 2016 whether to split off its generics, but delayed the decision until 2019 after announcing its merger with Allergan. Conover said the decision could be moved to late 2017 or 2018.
The federal government has grappled with a wave of inversions in recent years as U.S. companies have sought to slash their tax bills by redomiciling overseas, although their core operations and management usually remain in the United States even as they claim a new tax home.
Several U.S. presidential candidates, including Republican Donald Trump and Democrat Hillary Clinton, have seized on the issue in their campaigns.
Obama, a Democrat, has called repeatedly for action by the Republican-controlled U.S. Congress on inversions, but lawmakers have done little. He repeated his appeal to Congress on Monday and said he welcomed the Treasury’s action.
“To us, whether Pfizer and Allergan stay committed will be known shortly – more important for many is if the deal breaks, where should Allergan trade?” Wells Fargo analyst David Maris wrote in a research note on Tuesday morning.
Maris lowered his valuation range for the stock to a range of $265 to $270 from a range of $345 to $350.
Shares of M&A advisory firms tumbled in response to the new U.S. inversion rules. The S&P 600 Investment Banking & Brokerage Index lost 2.9 percent, M&A advisor Evercore Partners fell 4.7 percent, while Greenhill & Co was down 4.5 percent.