Shire PLC’s (LSE: SHP) shares have collapsed by around a third this morning, after AbbVie Inc revealed that its board of directors was reconsidering the company’s offer to acquire Shire. 
According to this morning’s press release from Shire, the company confirmed that it had:
“… received notice from AbbVie under the Cooperation Agreement of the AbbVie Board’s 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…”
AbbView’s 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.
Reconsidering
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. AbbVie’s board still has a lot of work to do before a new offer can be offered.
AbbVie’s 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 Treasury’s 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 can’t 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 must convene an AbbVie stockholder meeting to consider the adoption of a new merger agreement.
So, there’s still scope for the deal to go ahead.
Proceed with the deal
Shire’s management has argued that AbbVie should proceed with the offer, which would be possible. Indeed, it’s possible to structure deals around the new tax inversion rules. However, this would see AbbVie hand over more control to Shire’s current shareholders, something that could enrage AbbVie investors.
Whatever the outcome
Still, whatever the outcome Shire’s 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 company’s war chest for bolt-on acquisitions. So over the long-term, the company’s future remains bright.