Earlier this month, the U.S. Treasury Department announced new rules to limit corporate inversions, essentially killing the proposed $160 billion merger between Pfizer and Allergan. The merger would have allowed Pfizer to move its headquarters to Ireland and enjoy substantial tax breaks—Ireland’s corporate tax rate is 18% compared to the maximum of 35% in the U.S.

This marks the third time within the last few years that the U.S. Treasury Department has stepped in with new regulations to try to limit inversion deals. These new regulations specifically target “serial inverters” as well as “earnings-stripping.” What does this mean?

Under the old rules, in a merger with an overseas company, the U.S. organization’s shareholders must own 60% or less of the new company in order for it to be considered foreign and not have to pay U.S. taxes, according to Dane Hamilton, U.S. Healthcare Editor of Dealreporter/Mergermarket. If they owned 80% of the company than it would still be subject to U.S. taxes and if the number was between 60% and 80%, then the new company would still be considered foreign but it would be subject to some tax penalties. Under the proposed deal, Pfizer would have owned less than 60% of Allergan, but the new regulations change how the size of Allergan is calculated.

“Some companies are serial inverters,” Treasury Secretary Jacob J. Lew said in a statement. “They acquire multiple U.S. firms in stock-based transactions over a short period of time. This increases their size and reduces the negative tax consequences of a subsequent inversion.”

While Lew did not mention the company by name, that is what Allergan has been doing over the past three years. Allergan merged with U.S.-based Actavis last year, which had been on an M&A tear acquiring companies such as Warner Chilcott and Forest Laboratories. But under the new rules, those acquisitions do not factor into the size of Allergan, because now, any acquisitions of U.S.-based organizations made by a foreign company within the last three years would be disregarded. This made Allergan much smaller and it made it less likely the two companies would go through with the merger.

“In effect, U.S. Treasury basically cancelled the ability for Pfizer to make it into an inversion without saying it has anything to do with Pfizer and Allergan,” Hamilton says. “So, yeah, they kind of screwed up the deal.”

While the U.S. Treasury’s other announcement did not factor into the Pfizer-Allergan deal, it is still important to point out for companies that have been able to pull off an inversion deal. The U.S. Treasury is also cracking down on earnings-stripping. This occurs when the now U.S. subsidiary burrows money from its parent foreign company, which allows the U.S. company to deduct interest payments on these loans and avoid having to pay taxes on it. But the new rules would now characterize debt instruments issued to a related party as equity, eliminating the benefit of interest deductions, according to a client alert issued by Cooley.

What’s Next for the Industry?

The U.S. Treasury’s new regulations didn’t just kill the proposed Pfizer-Allergan merger, but any mega-merger with tax breaks in mind.

“It’s not going to affect deals between U.S. companies or if companies in Europe or Asia or wherever want to acquire U.S. companies, but the prospect of saving money on taxes is going to be limited by this Treasury ruling,” Hamilton explains. “Instead companies will have to process mergers based on strategic industrial logic, which companies do all the time. So while inversions are probably a trend that’s reached the end of the line, M&A overall hasn’t.”

Hamilton also believes that these new regulations are likely to stick following the election of a new president. As he explains, all of the leading presidential candidates—Donald Trump, Hillary Clinton, and Bernie Sanders—have all spoken out against inversions and would likely appoint a U.S. Treasury Secretory that shares their views. However, as even Lew, the current Treasury Secretary, continues to point out, tax reform is actually up to Congress. But to this point, Congress has been deadlocked on this issue as Democrats want to lower the 80% threshold to 50% and Republicans prefer to wait for a broader reform of the tax code, according the Wall Street Journal.

What’s Next for Pfizer?

Following the termination of the merger, Pfizer Chairman and CEO Ian Read once again brought up the idea of splitting up the company.

“We plan to make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016, consistent with our original timeframe for the decision prior to the announcement of the potential Allergan transaction,” Read said in a statement. “As always, we remain committed to enhancing shareholder value.”

Hamilton believes it is likely that Pfizer will split up its businesses as “companies don’t talk about splitting up unless they have a serious plan.” He adds that it remains a question whether this would create value, but says that sometimes two companies can run more efficiently than one company put together. But for now, he adds, Wall Street remains divided on this potential move.

What’s Next for Allergan?

Brent Saunders, Allergan’s CEO and President, said that the company remains strong despite the merger falling apart.

“While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth built on a set of powerful attributes,” he said in a statement. “Leading therapeutic franchises with strong brands across seven therapeutic areas provide the foundation for continued strong growth in 2016 and beyond. Our pipeline is one of the strongest in the industry, loaded with 70 mid-to-late stage programs including 14 expected approvals and 16 regulatory submissions in 2016 alone.”

But Hamilton expects the company to make another acquisition or two using the $40.5 billion it will receive for selling its generics business to Teva. While that deal from earlier this year hasn’t officially gone through yet, Hamilton estimates that Allergan will put about a quarter of the proceeds toward share buybacks and then use the rest for acquisitions.

“I think Brenton Saunders is the type of guy that likes to do fairly substantial acquisitions so we can expect $10 to $20 billion acquisitions going forward,” Hamilton adds. “Do I expect him to buy Bristol-Myers Squibb? No. But I wouldn’t be surprised if he acquired a specialty pharma company or two.”

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