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Remember the quaint old days, when mergers aimed for cost savings? Ah, the deals of yesteryear. It is all about taxes now. When Actavis bought Ireland-based Warner Chilcott earlier this year, the lower tax rate in the target's domicile was a key attraction. Perrigo, a U.S. generic drugmaker, is also moving. It announced an agreed $8.6-billion (U.S.) offer on Monday for Ireland's Elan Corp largely justified by turning itself into a lightly-taxed Irish company.
Perrigo's offer looks high enough to bring an end to the takeover saga at Elan, which has been an M&A candidate for almost as long as it has been in business. It values Elan at $16.50 a share, a 10.5 per cent premium to Friday's close and well above the maximum $15.50-a-share expired offer for Elan from Royalty Pharma. Excluding Elan's $1.9-billion of cash, Perrigo's offer is worth $6.7-billion – a steep price for Elan's only real asset, its share of royalties for Tysabri, a multiple sclerosis drug.
Perrigo says it will harvest $150-million of synergies annually from fiscal 2015. Most of these will presumably be achieved through the change of domicile. The U.S. corporate tax rate is 35 per cent; Ireland's is 12.5 per cent. But Perrigo's effective tax rate in the first nine months was just 27.5 per cent, so the advantage, while substantial, might be less than it seems. Moreover, tax shopping is hardly popular, and there must be doubt over how sustainable Ireland's rate is in the long term.
Perrigo chief executive Joseph Papa's best ally in this acquisition is his company's shares, which are at an all-time high (though they fell on news of the deal). Some 60 per cent of the offer is in this rich currency, with the remainder in cash, giving Elan shareholders 30 per cent of the new Perrigo. Mr. Papa has a good record as an acquirer. But his stay in Ireland will have to be very tax-advantageous indeed to justify the dilution to his existing shareholders.