The shares of Allergan (AGN) are sinking after the U.S. Treasury yesterday announced new rules that are supposed to eliminate much of the tax benefits of so-called "inversion" deals. Allergan has agreed to be acquired by Pfizer (PFE) through such a deal. According to a number of analysts, the Treasury's new rules will prevent Allergan's acquisition by Pfizer from proceeding as an inversion, as intended.

BACKGROUND: Last night, the U.S. Treasury announced that it was proposing new rules that would place further limits on inversion deals. The new regulations will "take away a significant amount of the tax benefits" that companies obtain from carrying out multiple inversions over a number of years, Treasury stated.

ANALYST REACTION: The "serial inversion" rule introduced by the U.S. Treasury sets an 80% threshold on Allergan's ownership of the company that would be formed from its merger with Pfizer, wrote Citi analyst Liav Abraham after speaking with a legal expert about the matter. Under the deal between Allergan and Pfizer, Allergan's ownership of the combined company "will likely approach and potentially exceed" the threshold, the analyst stated. As a result, the deal will probably not go forward as an inversion transaction, according to Abraham. However, standalone Allergan can use cost cutting to drive its fiscal 2017 EPS up to about $18 per share, and its balance sheet is "pristine," while its organic earnings growth is "superior," according to the analyst, who kept a $360 price target and Buy rating on the shares. Wells Fargo analyst David Maris thinks that the proposed regulations "potentially put Allergan's merger with Pfizer at risk." However, Maris wrote that if the deal does fall apart, Allergan will have "strong earnings growth and a great pipeline," while its balance sheet is "solid" as a result of its pending generics deal with Teva (TEVA). Maris cut his price target on Allergan to $265-$270 from $345-$350 but kept an Outperform rating on the shares. Treasury's new rules could derail not only the Allergan deal, but also all of Pfizer's efforts to carry out inversion deals, wrote Jefferies analyst Jeffrey Holford. Although Pfizer could still consider pursuing "other inversion targets," including GlaxoSmithKline (GSK) and AstraZeneca (AZN), "the inversion story feels tired" after Treasury effectively vetoed two large cap pharma inversion deals, according to the analyst. Holford kept a $42 price target and Buy rating on Pfizer.

OTHERS TO WATCH: Waste Connections (WCN), which is headquartered in the U.S., and Canada's Progressive Waste Solutions (BIN) announced in January that they have entered into a definitive agreement to merge in an all-stock transaction. In a note to investors after Treasury's announcement, Deutsche Bank analyst Joshua Shanker said he believes the new rules announced last night will limit Willis Towers Watson's (WLTW) tax-related flexibility. Remarking on the Treasury rules, IHS (IHS) and Markit (MRKT) said a preliminary review leads the companies to expect that the new rules would not result in the IHS Markit merger-of-equals transaction being subject to U.S. Code 7874. "Based on our preliminary review at this time, we also believe that the other U.S. Treasury rule changes will not impact the combined company's adjusted effective tax rate guidance of a low to mid-twenties percentage range," the companies added. Meanwhile, Shire (SHPG) told Bloomberg in an emailed statement that its acquisition of Baxalta (BXLT) is not an inversion and that it will take time to go over the Treasury's new guidelines.

PRICE ACTION: In morning trading, Allergan sank 16.7% to $231.20, while Pfizer added 0.5% to $30.86. Baxalta fell 4%, Shire slid 3.7%, Willis Towers Watson dropped 2.7%, IHS dipped 1%, Markit declined 2.2%, Waste Connections was down 5.3% and Progressive Waste fell 8%.