In an unprecedented merger that will create the world’s largest pharmaceutical company, Pfizer Inc. and Allergan announced on Monday that they’re merging in a deal worth up to $160 billion.
The new company, Pfizer Plc, will be the world’s largest drugmaker, make drug products ranging from Viagra to the Prevnar pneumonia vaccine to Botox — but it will be doing so with its official headquarters in Dublin, Ireland, where Allergan is based and the official tax rate is lower than in the U.S.
The drug company tie-up is the biggest deal in what’s been a big year for mergers and acquisitions. Besides health care and pharmaceuticals, the wave of deal-making has also swept through airlines, timber, telecommunications and brewers. U.S.-targeted M&A activity just hit $2 trillion for the year, according to Thomson Reuters, propelled by a flurry of large deals: Marriott and Starwood Hotels & Resorts, Weyerhauser and Plum Creek Timber, Walgreens Boots Alliance and Rite Aid, Anheuser-Busch InBev and SABMiller.
As the drumbeat of deal announcements continues, Jack Ablin, chief investment officer of BMO Private Bank, wrote in an email last week, “a growing number of sectors in the U.S. are being dominated by fewer and fewer companies.” Under federal antitrust standards, almost one-third of industries are considered “highly concentrated,” up from one quarter in 1996.
Here’s everything you need to know about the current M&A frenzy in the U.S.
Why are these deals happening now?
In a challenging environment for profits, companies are looking to satisfy shareholder demand for earnings growth through big deals. Businesses are also rushing to jump on opportunities presented by the historically low interest rate environment and cheap capital. Interest rates are likely heading higher, with the Federal Reserve poised to hike its benchmark rate next month. Higher rates would make it more expensive for companies to finance deals.
Chris Christopher, director of global consumer economics at IHS, adds that because “low hanging fruit from emerging markets are no longer in play,” American companies are engaging domestically. The U.S. accounts for half of the total value of global M&A activity so far this year.
For pharmaceutical companies in particular, the deals are still being driven by a desire to reduce taxes through what’s called corporate inversion — controversial transactions that, as in the case of Pfizer and Allergan, involve officially relocating corporate headquarters to foreign countries in order to reduce U.S. tax liabilities. Pfizer expects that the new company will have an adjusted tax rate of between 17 and 18 percent, down from its current 25 percent rate.
The Treasury Department released new rules last week that will cut the tax benefits from corporate inversions, following on other steps it took last year to make such deals less attractive. “These transactions erode the U.S. tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans,” the department said in announcing its restrictions last year.
What does this mean for you?
It depends. Consumers might see a rise in prices for some products because companies will have increased their market share through M&A and nudged out more competition. This fear is most prominent in the health care industry, which has seen this year’s biggest deals in terms of value. Consolidation among the nation’s five largest health insurance companies will leave three giants atop the industry. Without as much competition, insurers could raise premiums or hospitals could jack up prices.
While some mergers might hurt consumers, Christopher also lists some possible benefits: Companies might be able to lower prices as a result of increased efficiencies and reduced costs achieved by merging. Consumers might also see a greater variety of goods and services become available to them because newly acquired brands or products are brought into new markets.
Should we expect this trend to continue?
Probably. Deals tend to lead to more deals because companies don’t want to miss out on opportunities. Companies are also wary of falling behind competitors, who are “acquiring new products, getting into new markets and outpacing you,” says Matthew Porzio, an expert on mergers and acquisitions at Intralinks, a provider of enterprise collaboration software.
Intralink’s “Deal Flow Predictor” report projected last month that dealmaking activity would grow by 7 percent year over year in the first quarter of 2016.
The merger frenzy will eventually cool off, though, Porzio says. “There are only so many good assets that can go to market, that can be bought, that can be digested, and eventually things shift in terms of the economy and how much people are willing to pay for these acquisitions,” he says.
The pharmaceutical and bio-technology sectors may be an exception, though, as Porzio says M&A has replaced R&D. The large companies in this industry are shifting their focus from developing new technologies or drugs to acquiring smaller companies with products they can push through their existing distribution channels.
Tom Cane, managing editor of Mergermarket and Dealreporter, also thinks that the M&A trend will continue, but a key determinant of the activity level will be when the Federal Reserve decides to raise rates. “All in all,” Cane says, “it looks like a very good market moment.”