What's going on?

The biggest M&A�deal this year and the biggest ever in the healthcare industry was announced on Monday! �Pfizer (the maker of Viagra, amongst other drugs) and Allergan (botox amongst others) agreed to merge, thereby creating the world�s largest drug maker (worth around $160 billion).

What does this mean?

Pfizer should benefit from Allergan�s higher growth rate while Allergan should benefit from Pfizer�s greater geographical diversity (enabling it to sell drugs into new territories more easily). The companies also expect to save money from �synergies,� which basically means overlapping costs that can be eliminated.

Unlike Pfizer, Allergan usually avoids developing its own drugs and instead buys rights to drugs developed by others and just focuses on selling them. This strategy is somewhat controversial and subject to possible political pressure. The future strategy of the combined entity will be interesting to watch and might, over time, lead to a reduction in Pfizer�s R&D efforts (on which they spend about $8 billion per year).

Why should I care?

The bigger picture: Pfizer is doing this deal because of the tax benefits it�can realise by leaving America. The new company will be an Irish entity (Allergan�s home jurisdiction). By leaving the US, Pfizer is reducing its tax rate from 25% to 17-18%. It also avoids paying US tax on $128 billion of previous overseas profits. This kind of a deal is referred to as �tax inversion� — it’s a major issue that has yet to be fully addressed by politicians.

For stocks: Pfizer might be getting a bargain. Most investors were moderately surprised that Pfizer (which will own 56% of the combined company) didn�t have to pay more for Allergan. Which might explain why Allergan shares were down more than�3% on Monday.