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Investors Aren’t Convinced the Pfizer-Allergan Deal Is a Go

The gap between Pfizer’s offer and Allergan’s stock price suggests investors are skeptical about the deal

Mind the gap.

Pfizer officially announced on Monday morning that it planned to acquire fellow pharmaceutical company Allergan in a so-called tax inversion deal, agreeing to pay roughly $160 billion for the company, including debt. According to the terms of the deal, each Allergan shareholder will receive 11.3 shares of Pfizer stock for every share of Allergan share they own. Pfizer is also kicking in another $12 billion in cash for the deal. That means when the deal closes, Allergan shareholders are likely to get around $355 a share. Yet, by mid-afternoon, hours after the deal was announced, Allergan’s shares weren’t trading for $355, or even $330. Instead, Allergan shares closed at just under $302, or 17% below what Pfizer said they were planning on paying for them.

It’s not uncommon for there to be some gap between what an acquirer says it will pay for a target and where the target’s shares trade. But the gap in the Pfizer-Allergan deal is larger than average. This suggests that investors are concerned the deal will not be completed.

By Monday afternoon, all three Democratic presidential candidates, Hillary Clinton, Bernie Sanders, and Martin O’Malley, had come out against the deal, saying it and deals like it are bad for American taxpayers and the economy. Clinton said she would put out proposals as early as next week to stop inversion deals, a scenario in which U.S. companies buy foreign companies and relocate overseas to reduce their tax bill.

“It’s a politically controversial deal,” says Ira Gorsky, an analyst at research firm Elevation LLC. “And the gap is a function of how much risk investors think there is in getting the deal done.”

Kevin Kedra, who follows Allergan for the research arm of mutual fund firm Gabelli & Co., thought the gap was unusual. He says the deal was leaked a few weeks ago to gauge the Treasury Department’s reaction. Last week, Treasury released new rules to limit tax inversions. But Kedra and others say none of those rules will do anything to stop the Pfizer-Allergan deal. He says investors may be overly skeptical.

“It’s a larger than usual gap,” says Kedra. “But other than an act of Congress, which I don’t think will happen, the deal gets done.”

Despite the wide gap, some are saying investors aren’t actually all that skeptical. Recently, a number of large deals have been trading at larger than usual gaps. That’s in part because of the high volume of deals. Once a deal is announced, so-called merger arbitrage hedge funds typically jump in, buying the shares of the company being acquired and shorting the stock of the company doing the acquisition. The pressure of that buying and shorting usually narrows the gap between the stock price of the acquirer and the target company. But while merger activity has boomed this year and now stands at an all-time high, the money in merger arbitrage funds has not kept up. That’s left less money to go around to arbitrage away the gaps.

“Arbs can’t control the spreads like they used to,” says Gorsky.

This article originally appeared on Fortune.com

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