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Auxilium and QLT to Merge on Tax Saving Attractions

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In a bid to diversify its portfolio and save taxes, Auxilium Pharmaceuticals entered into a definitive agreement to merge with Canadian entity QLT in an all stock deal. The deal, cleared by the boards of directors of both companies, is expected to close by year end. Shares of QLT were positively impacted by the news.

The Deal

The deal has been structured in a complex manner. According to the terms of the deal, shareholders of the U.S. based specialty biopharmaceutical company, Auxilium, will receive 3.1359 shares of QLT for each share currently held by them following the closure of the transaction. According to the press release, the deal offers a premium of 25% for QLT stockholders on the basis of the Jun 25 closing prices of Auxilium and QLT on the Nasdaq.

Shareholders of Auxilium will own 76% of the combined entity and the rest will be held by QLT stakeholders. Shares of the combined entity will trade on the Nasdaq. The board of directors of the merged entity, New Auxilium, will include the Auxilium board along with two members from QLT’s existing board.

Primary Motive to Save Taxes

New Auxilium will be based in British Columbia, Canada. The relocation of headquarters will enable Auxilium to significantly reduce its tax liabilities. In the event of the deal going through, Auxilium stated that its long-term effective tax rate could be reduced from the high 30s to mid 20s (in percentage) or even lower since the U.S. corporate tax rates are much steeper.

A Trend in Vogue

Auxilium is not the only U.S. company looking to cut its tax expenses through an impending merger. The practice of reducing tax liability by making an international acquisition and shifting the base there is quite prevalent among U.S. companies. Late last year, Perrigo (PRGO - Free Report) relocated its headquarters to Ireland by acquiring Elan, thereby avoiding U.S. corporate tax obligations. The acquisition of Warner Chilcott by Actavis in 2013, leading to the formation of Ireland-based Actavis plc (ACT - Free Report) , also held tax-saving attractions.

QLT carries a Zacks Rank #4 (Sell), while Auxilium is a Zacks Rank # 5 (Strong Sell) stock. A better-ranked stock in the healthcare space is Allergan (AGN - Free Report) , sporting a Zacks Rank #1 (Strong Buy).

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