Shire PLCs(LSE: SHP) shares have collapsed by around a third this morning, afterAbbVie Increvealed that its board of directors was reconsidering the companys offer to acquire Shire.
According to this mornings press release from Shire, the company confirmed that it had:
received notice from AbbVie under the Cooperation Agreement of the AbbVie Boards intention to consider whether to withdraw or modify its recommendation in light of the impact of the U.S. Treasury Notice of 22 September 2014
AbbViews notice refers to the decision by the US Treasury to introduce laws restricting the process of so called tax inversions, whereby a American company shifts its tax base overseas to take advantage of a lower corporate tax rate. These new rules have now put the 32bn deal between Shire and AbbVie at risk.
The deal between Shire and AbbVie is not over just yet. AbbVie has only stated that it is reconsidering the deal, although the market seems to believe that the company will walk away altogether. For AbbVie, walking away would be costly, as the deal was agreed with a hefty break penalty in place, which would see Shire receive $1.6bn if the deal does not go through. However, any new deal would also be costly and time consuming to implement. AbbVies board still has a lot of work to do before a new offer can be offered.
AbbVies board of directors will meet on October 20 to review the plans and will, amongst other things, consider:
the impact of the US Department of Treasurys proposed unilateral changes to the tax regulations announced on September 22, 2014, including the impact to the fundamental financial benefits of the transaction
It seems as if both parties are aware that the deal cant go ahead in its current form. But even after a new deal is put together, it must still be voted through by shareholders. AbbVie has noted that it mustconvene an AbbVie stockholder meeting to consider the adoption of a new merger agreement.
So, theres still scope for the deal to go ahead.
Proceed with the deal
Shires management has argued that AbbVie should proceed with the offer, which would be possible. Indeed, its possible to structure deals around the new tax inversion rules. However, this would see AbbVie hand over more control to Shires current shareholders, something that could enrage AbbVie investors.
Whatever the outcome
Still, whatever the outcome Shires underlying business remains one of the best in the pharmaceutical sector. Additionally, the $1.6bn break fee received after a deal fell through would only boost the companys war chest for bolt-on acquisitions. So over the long-term, the companys future remains bright.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.