Price the Reason Pfizer-AstraZeneca Deal Died - Essay Example

Price the Reason Pfizer-AstraZeneca Deal Died, CFO Says” Word Count: 1995 The merger and acquisition (M&A) of AstraZeneca by Pfizerwould have been one, if not the largest, of its kind in recent M&A’s in the pharmaceutical industry. Pfizer Inc., closing in at $31.12 USD as published by the Wall Street Journal (2014a) in the stock market as of December 17 has been at a constant steady growth. While AstraZeneca PLC ADS, not to be underestimated, closed in at $70.19 at the same time in the New York Stock Exchange (Wall Street Journal, 2014b). Both companies are at the upper tier of their industry with Pfizer, a United States domain company, being a lead innovator in the medical field by introducing pioneering medicines has continued to be a durable multi-national corporation. AstraZeneca, based in the United Kingdom, is relatively younger than Pfizer but has proved to be a force to be reckoned with in the biopharmaceutical industry. Without a doubt, a merger between the two companies would have brought a new dimension that would have served the purpose of Pfizer’s proposal. Nevertheless, the failed negotiations occurred because of the inability of the two parties to compromise on a price. Price was a factor that Pfizer’s Chief Financial Officer Frank D’Amelio bluntly revealed to summarise the failed M&A. Mergers and acquisitions could be initiated by a number of reasons but its end result always drive towards one thing, a major change that occurs not only in one company but in at least two that more or less rocks the boat for the stakeholders involved. A merger of this magnitude would have spurred a synergy between Pfizer and AstraZeneca which are in different concentrations in the same field. In fact, AstraZeneca is a product of a large scale M&A in the 1990s between the Swedish corporation Astra and the Zeneca Group from Britain. The likes of which can only be compared to that of pharmaceutical giants Glaxo Wellcome and SmithKline Beecham in order to form what came to be GlaxoSmithKline. “These acquisitions in ‘pharmerging’ markets helped Big Pharma to expand the geographical footprint while benefiting from forecasted double digit growth in some of these regions” (Cepton Strategies, n.d., n.p.). What has been termed as ‘pharmerging’ is a growing trend that has allowed for big businesses to synergize more efficiently toward beneficial returns. This cross-border possibility for pharmaceutical businesses has truly allowed for the making of a certified global brand. Since prescription and over the counter medicines demonstrate an internationally standardized form according to diagnosis and symptomology, pharmaceutical companies can easily expand in different countries worldwide. This also accounts for their universal acceptance which makes it a multi-billion dollar industry. For Pfizer, the big reason behind its inclination to enforce an M&A with the British AstraZeneca is its desire to defeat the taxing laws of the United States. Government regulations are strong driving force that could instigate a merger. At present, the taxing rate in the United States for companies is at a higher 35%. With its plans to move its base to the United Kingdom, Pfizer aims to considerably lower the taxing costs for the advantage of the corporation. The savings projected by Pfizer is calculated to be in billions of dollars in consideration of a decade’s tax imposition. Pfizer executives project that the tax bill they will be able to cut amounts to roughly $1 billion each year. This practice has become more common lately for U.S. corporations to move their businesses to European countries like Ireland or the Netherlands in what has been known as ‘inversion’ where they transfer a minimum 20% foreign ownership of their shares (Hoffman, 2014). This has been viewed by financial analysts of American companies to be a logical move for their company’s maintained growth. The U.S. system of taxation adopts a method where corporations are taxed on income that they earn within the country’s geographical location as well as on income earned outside of its borders as a general rule, subject to allowances to prevent the effects of double taxation. All of these income realized by domestic corporations are subject to tax at a rate of 35%. There are three kinds of corporate inversions, one is where a corporation’s activities are substantially transferred in foreign jurisdiction, next is when a company merges with a bigger foreign company, last is when a local corporation merges with a smaller one (Marples & Gravelle, 2014). This last kind is evidently what has been in the works between Pfizer and AstraZeneca where the former would divest some of its operations in the United Kingdom but its shareholders will continue to maintain the majority of AstraZeneca’s shares. Evidently, a main reason for Pfizer actively pushing for this M&A is due to the previous success they have realized through a similar move. Back in 2009, Pfizer acquired Wyeth where about $37 billion of its business was transferred abroad and from $42 billion worth of earnings in 2009, it has spiked to $73 billion in only three years. These amounts have not been subject to U.S. tax since it fell on a tax exclusion temporarily enforced at that time. But different outcome could now affect its shareholders due to recent government regulations. “An inversion by Pfizer would, however, result in current shareholders paying capital gains taxes on any stock appreciation when they are converted into shares of the new company” (Marples & Gravelle, 2014, p.8). Prior to Pfizer’s acquisition of Wyeth, it had executed several actions to acquire the approval of the government of their business plans. CFO Frank D’Amelio has been a pivotal force in ensuring the path that Pfizer was to take in its projections for the future. For CFO D’Amelio, it is far more sensible for Pfizer to move offices in order to circumvent the staggering tax laws and AstraZeneca is a great way to push with the changes they want to implement. He admittedly said, “Will I lever up the balance sheet if necessary to get a deal done that I think will create significant value for shareholders? The answer is I would” (qtd. in Pettypiece, 2014, n.p.). Corporate governance plays a vital role in this decision-making process to ensure that the interest of all shareholders is considered. In this regard, he has proven himself as a go-to guy in the key decisions for Pfizer and its Board. Together with CEO Ian Read who has effectively allowed him a greater leeway in his plans for the company, D’Amelio has showed infallible confidence in his foresight. The government regulations that significantly reduce the profit of the company have propelled him and his group to figure out a way to avoid the impact of the burdensome United States taxation system. Though this will surely be met with a number of detractions, especially on the part of the government, a structure that legally evades this liability had been executed before by Pfizer through Wyeth. The issue of price ultimately caused the merger to fizzle but this does not deter D’Amelio from pursuing other means to carry out his strategies. Comparatively, the stock market valuation of AstraZeneca is considerably higher than Pfizer with the former more than double its value than the latter. The difference would lie in the sheer expanse and the Net Realisable Value of Pfizer that on its Income Based Value alone together with its assets could topple AstraZeneca’s hypothetical valuation in the stock exchange. Clearly, a company stock market valuation does not in itself identify the true value of the corporation and the value of each share. In this regard, the low assessment of a Pfizer share compared to the higher assessment of an AstraZeneca share would not reflect, in clear definite valuation, its true value. Obviously, AstraZeneca viewed its market value to be considerably higher than what Pfizer took it for and what it was willing to pay to acquire the British company. An inquiry devolves to what measure was used for both parties in consideration of the fair and reasonable price of each share. Considerably, the Net Asset Valuation of a share is less than its more tangible stock market estimate. But there are more things that yield value such as the goodwill of a company or its manpower which is not as easily quantifiable. In this M&A, AstraZeneca has the upper hand in dictating the terms of the negotiations since Pfizer has the more compelling reason to see to it that it pushes through considering their driving force that set everything in motion. As with any business quantifying method, not one measure is definitively precise and there are of course other personal aspects that influence every business decision process. AstraZeneca is trading well in the stock exchange considering the date of the failed M&A, a detail which continues to this date. At the time, Pfizer’s price per share gradually decreased by 1% at $29.43 though it had shown an average 3.6% growth in the preceding year. AstraZeneca, on the other hand, increased in value by 1.2% at £52 in the London Stock Exchange (Pettypiece, 2014). AstraZeneca has consistently been trading well that it can afford to stand on its own with or without Pfizer’s meddling. These factors show that it has the advantage to dictate the terms of the M&A much to the disappointment of Pfizer and D’Amelio. Nevertheless, the American pharmaceutical giant is far from being fazed with their attempts. With the hopes of extensively increasing the value of its shares through an expatriation move, D’Amelio indicates that a Pfizer and AstraZeneca merger is far from being buried in the books. He has indicated an aggressive announcement of enthusiasm to take measures for this vision. Indicating that he is willing to increase Pfizer’s debt in order to create liquidity, D’Amelio has consistently shown that he is not backing down and that the failed first attempt would not discourage Pfizer. To this end, drastic measures are contemplated by D’Amelio for the success of the M&A. Again, this is not the first time that such actions were imposed by Pfizer under his supervision. In the Wyeth M&A, Pfizer was able to forestall its concerns on patent expiration and diversify into other areas in the industry by acquiring a company that is largely dedicated to vaccines and animal health development. The latter investment resulted to a divestment because of the overlap of their products in animal health products. To acquire Wyeth, “it had to borrow an additional US$22.5 B in the current financial climate to acquire a counterpart that was in a similar predicament in itself” (Ahmed, 2009). Nevertheless, the M&A proved to be a successful one with revenues showing considerable growth. It is not inconceivable that Pfizer may actually have to sell some of its considerable assets to compensate for the price that AstraZeneca is requiring from. Something that is similar to its Wyeth acquisition. In this course of action, D’Amelio is that one executive that is accountable for the appropriate course of action that they must take. The main thing to consider in all these is the guarantee that a greater value is achieved for each and every shareholder. In the grander scale of things and in consideration of that one usual maxim in business management, ‘you have to spend money to make money.’ If a company is not willing to take the risk and to challenge its own status quo, then growth will definitely be hard to come by. CFO D’Amelio is the embodiment of diversification that has permitted Pfizer to maintain its place as a formidable corporation in the competitive and lucrative business of pharmaceutical products. The question remains on whether or not Pfizer can effectively achieve its plan to thwart the unwarranted tax rates that is imposed upon corporations. More importantly, will this not affect stockholder’s earnings by additional burdens to be imposed on them by the U.S. government to recompense the effects of Pfizer’s tax elimination method? At some level, an element of mystery keeps everyone on their toes that keeps everyone wondering, what will happen next? References Ahmed, T. (2009). Pfizer Swallows Wyeth - Could Spark Other Acquisitions. PharmaDeals Review, 1, 1-2. Retreived 26th January 2009 from Pharma Ventures https://www.pharmadeals.net/journal/pharmadealsreview/fulltext/pdf/93 Cepton Strategies. (n.d.). Pharmaceuticals Mergers & Acquisitions: Pharmaceuticals Mergers & Acquisitions in the Pharmaceutical Industry. Retrieved from http://www.cepton.net/CEPTON_M&A_DINA4_150413.pdf Hoffman, L. (2014, April 28). Pfizer Sees Tax Savings From AstraZeneca Deal. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB10001424052702304163604579530162313579896 Marples, D. J., & Gravelle, J. G. (2014). Corporate Expatriation, Inversions, and Mergers: Tax Issues. Congressional Research Service. Retrieved from http://fas.org/sgp/crs/misc/R43568.pdf Pettypiece, S. (2014, June 12). Price the Reason Pfizer-AstraZeneca Deal Died, CFO Says. Bloomberg. Retrieved from http://www.bloomberg.com/news/2014-06-11/pfizer-cfo-says-astrazeneca-deal-broke-down-over-price.html Wall Street Journal. (2014a, December 17). Pfizer Inc. PFE (U.S.: NYSE). The Wall Street Journal. Retrieved from http://quotes.wsj.com/PFE Wall Street Journal. (2014b, December 17). AstraZeneca PLC ADS AZN (U.S.: NYSE). The Wall Street Journal. Retrieved from http://quotes.wsj.com/AZN Read More