Shares in drugmakers AstraZeneca and Shire both fell more than 5 percent on Tuesday after the U.S. Treasury took steps to curb "inversion" deals that allow companies to escape high U.S. taxes by reincorporating abroad.
The move could jeopardize an agreed deal for AbbVie to buy Shire for $55 billion and deter Pfizer from making another attempt to acquire AstraZeneca, after a $118 billion takeover attempt failed in May.
The slide in both companies shares wiped out around $8 billion in their combined market value.
Investors had been expecting some action from the Obama administration to clamp down on tax-avoidance inversions but the steps announced on Monday were more far-reaching than anticipated, analysts at Deutsche Bank said.
The new rules, effective immediately, will make new inversions more difficult to do and less potentially rewarding.
The action follows months of political debate, with Democrats urging prompt legislative action and Republicans pushing to address the problem later, perhaps in 2015, as part of a broader overhaul of the loophole-riddled federal tax code.
"Inversion deals now are clearly going to be very difficult to pull off," Navid Malik, head of life sciences research at Cenkos Securities, said.
That could kill off prospects of Pfizer returning to bid for AstraZeneca at the end of November, when a six-month cooling-off period imposed by British takeover rules comes to an end and the U.S. company has a free hand to publicly launch a new offer.
The Shire deal, however, may still go ahead, since it is already in train, although AbbVie will lose upside from planned tax savings, making the picture uncertain. The transaction is due to be completed in the fourth quarter of 2014.
"Shire has enough momentum in its business and a good enough pipeline that it would be attractive to AbbVie anyway," Malik argued. "The tax inversion was the icing on the cake."
Inversions have surged in the past year, pursued by healthcare companies in particular, although fast-food chain Burger King Worldwide is also in the midst of inverting to Canada in a deal with Tim Hortons.
About 50 such deals have taken place since the early 1980s, but half of those have been completed just since the 2008-2009 credit crisis, according to a Reuters review.
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A key target of Treasury's actions is foreign profits held offshore by U.S. multinationals under a U.S. Internal Revenue Service (IRS) rule that defers taxation on such profits unless and until they are brought into the United States.
One new Treasury rule will prevent inverted companies from using "hopscotch" loans that allow them to avoid dividend taxes when tapping such tax-deferred foreign profits. Another rule will bar inverters from gaining access to the same kinds of profits by using "decontrolling" strategies that restructure foreign units so they are no longer U.S.-controlled.
Treasury is also tightening limits on the levels of ownership that the former U.S. owners can have in an inverted company to qualify for foreign tax treatment from the IRS, a move that will make it harder to do these deals.