Pfizer's Unsuccessful Takeover of AstraZeneca - Case Study Example

Pfizer case study Introduction Pfizer is a multinational pharmaceutical giant headquartered in New York, United s (US). In terms of its revenue,it is considered as one of the largest companies in the global pharmaceutical industry. In this context, it is noteworthy that the growth of company is significantly driven by mergers and acquisitions. The company has so far merged with a number of companies resulting to its steady growth and profit. It was observed recently that the company tried to acquire AstraZeneca but the effort went in vein. According to various sources, if the merger was successful it would have resulted in Pfizer occupying market position as the largest drug company globally. In this regard, it is necessary to have a brief knowledge about AstraZeneca. The company is a United Kingdom (UK) based pharmaceutical company headquartered in London. AstraZeneca is also recognised among top companies in the global pharmaceutical industry. Like Pfizer, this company also have significant experience in acquisition and mergers as it has acquired and collaborated with a number of companies in recent years. History of the case The case in this paper focuses on the failed merger between Pfizer and AstraZeneca which took place in May, 2014. It was gathered from the Guardian (2014a) that the chairman of Pfizer initially approached chairman of AstraZeneca regarding merger in November 2013 while the detailed discussion took place in January, 2014. The exploratory meeting between both the companies took place in New York on January 5, 2014. It was gathered that Pfizer offered a settlement payment of £58 billion or £46.61 per share in its preliminary proposal to AstraZeneca. The offer also included establishment of a new holding company listed and headquartered in the US. However, AstraZeneca’s board turned down the offer concluding that Pfizer has heavily undervalued the company and its prospects. The company also questioned transaction structure and offered inversion structure of Pfizer and ultimately the proposal ended by the mid of January 2014 (International Business Times, 2014; The Telegraph, 2014; The Guardian, 2014a; 2014b). On 26 April 2014, Pfizer contacted chairman of AstraZeneca for a new discussion regarding collaboration of both the companies but AstraZeneca declined this offer. Consequently, Pfizer publicised its interest in merger with AstraZeneca on 28 April 2014. The US pharmaceutical giant revealed that they are planning to offer AstraZeneca cash and share at an attractive premium. They further added that they would move company domicile to the UK so as to shield the external earnings from domestic taxation. On 29 April 2014, senior management members of Pfizer flew to Britain to have extensive discussion with investors of AstraZeneca and governing bodies of the UK. Pfizer made a new and a better offer to AstraZeneca of £63 billion bid or £50 per share. Alongside Mr. Read (chairman of Pfizer) communicated with prime minister of UK (David Cameron) with assurance of ensuring jobs and investment in the country and completion of £300 million planned research hub of AstraZeneca in Cambridge (International Business Times, 2014; The Telegraph, 2014; The Guardian, 2014a; 2014b). However, the raised bid was once again rejected by AstraZeneca and on 4 May 2014, UK labour leader Ed Miliband accused the national government for encouraging Pfizer and seek for independent assessment of the takeover proposal in the lights of national interest. AstraZeneca released its strategy update on 6 May 2014 citing the prospects of the company and its capability to increase revenue significantly as a standalone firm. Science minister and business secretary of the UK government supported Pfizer in this regard while appending that the company has assured them of protecting British manufacturing and strengthening British science base. It was gathered that between 6 May and 10 May 2014, a lot of political discussion took place regarding the merger where different political member presented diverse opinions. Mr. Read also agreed during this span that merger will result in reduction in research budget and jobs (International Business Times, 2014; The Telegraph, 2014; The Guardian, 2014a; 2014b). Between 14 May and 16 May 2014, a number of developments took place. Different science and business communities expressed their concern regarding the merger and its consequences. The shadow business labour secretary raised concern that AstraZeneca will be used only as a tax instrument by Pfizer post merger. ON 18 May 2014, Pfizer made a new proposal bid worth £69.4 billion (£55 per share) to AstraZeneca but the management turned down the offer suggesting that the offer was still an undervalued one considering growth prospects of the company and it looked like Pfizer was only interest in benefits such as tax minimisation and cost saving (International Business Times, 2014; The Telegraph, 2014; The Guardian, 2014a). Rationale for Pfizer’s bid on AstraZeneca According to various sources, AstraZeneca does not appear to be an attractive choice of investment as it employs only about 6700 employees in the UK and faced trouble in the late 2000s in context of issues in drug testing in final stage. However, the pharmaceutical firm is gaining importance as an attractive proposition because of its position in the British pharmaceutical industry. The company’s primary client is the NHS (National Health Services) and its products (drugs) form approximately 2.3 percent of the total export of the UK. It was observed recently that company has been involved in open innovation strategy regarding development of drugs related to cancer and diabetes treatment. Currently, the company employs around 51000 people worldwide. Additionally, the share price of the company has been strong and consistent for past several months resulting to significant progress in the oncology pipeline and diabetes franchise (Channel 4, 2014; iTV, 2014a; 2014b). It was gathered that the company is drawing significant attention of investors including that of Pfizer because of its drug development efforts in areas such as cancer, cardiovascular and metabolic diseases and inflammatory and respiratory diseases. For Europe and UK, the company is an important asset as it is the first company that collaborated with the Experimental Cancer Medicine Centres and Cancer Research UK. If Pfizer is able to acquire this company, then it will not only be the largest company by size but will also be an important company because of the innovative developments in the global pharmaceutical industry. Pfizer is strongly interested in AstraZeneca because it is one of the economically important companies from global perspective. From business perspective as well, AstraZeneca will be profitable for Pfizer as the company has global reach with a number of important research centres in the US, the UK and Sweden (Channel 4, 2014; iTV, 2014a; 2014b). Acquisition of AstraZeneca would have been a mega takeover for Pfizer and it would have delivered Pfizer the ownership of the work-in-progress of essential drug pipeline that AstraZeneca is working on; along with large workforce of highly skilled staff and opportunity of tax saving and cost minimisation. Tax management was considered as an important component of this venture because Pfizer planned to shift its domicile to the UK after merger as corporation tax rate of US (38%) is more than 50 percent of that of the UK (20%-22%). According to other sources, Pfizer is expressing its interest in the company after evaluating the future prospects of the parent standalone company and that of the new holding company. It can be easily figured out that the prospects of the holding company will be way better than that of the parent company. The acquisition will also strengthen the market position of Pfizer as it will be the greatest takeover of a listed UK company, greater than that by Kraft during the case Cadbury (Wall Street Journal, 2014). It was further ascertained that the revenue of Pfizer has weakened from $67.8 billion in 2010 to $51.6 billion in 2013 as a consequence of patent loss of certain high profile drugs of the company including Lipitor. Other drugs of the company also witnessed slow sale and the company expecting a boost in its sale by partnering AstraZeneca. According to the management of AstraZeneca, the company’s target revenue will grow by 75 percent in 2023. Alongside, the company is expecting to launch about 10 new drugs in coming seven years. Overall, tax benefits, cost saving and market value were determined to be primary reasons behind Pfizer’s bid for AstraZeneca (Forbes, 2014). Examining and reasoning the stock returns for both Pfizer and AstraZeneca during the bid process Table 1 Stock price on various dates of bidding period Pfizer (USD) AstraZeneca (GBP) Opening price Closing price Opening price Closing price 25 November 2013 32.12 32.14 3449.50 3437.50 6 January 2014* 30.77 30.55 3579.00 3598.50 14 January 2014 30.58 31.00 3714.00 3755.50 26 April 2014 (Saturday) N/A N/A N/A N/A 28 April 2014 31.59 32.04 4701.00 4666.50 2 May 2014 31.02 30.75 4825.00 4808.00 5 May 2014* 30.26 29.96 4808.00 4808.00 6 May 2014 30.00 29.43 4735.00 4677.50 7 May 2014 29.14 29.02 4622.00 4631.00 8 May 2014 29.12 29.17 4630.00 4713.00 10 May 2014 (Saturday) N/A N/A N/A N/A 13 May 2014 29.11 29.20 4635.00 4642.00 14 May 2014 29.14 29.10 4,642.50 4,654.00 15 May 2014 29.07 29.06 4,649.00 4,726.50 16 May 2014 29.00 29.12 4,741.00 4,823.50 18 May 2014* N/A N/A N/A N/A 19 May 2014 29.58 29.25 4,200.00 4287.50 (Source: Yahoo finance, 2014a; 2014b) * Considering Sunday, trading data for next day has been taken in consideration the same has been considered for Saturdays as, if and when applicable. In this section, stock opening and closing values of both the companies on the specific dates of the bidding process has been recorded and assessed. It was observed that on November 2013 stocks of Pfizer improved while that of AstraZeneca declined where the reason can be uncertainty associated with the unofficial talk between senior management of the company. With a lot of political debate going around regarding the takeover, it can be seen in the table that AstraZeneca’s share price improved while that of Pfizer slumped. However, the cancellation of the proposal from both side improved the share price of both the companies suggesting that shareholders expected the same rather than a sudden takeover (Yahoo finance, 2014a; 2014b). The fresh proposal in April raised share value of Pfizer as shareholders expected the same since the company publicised its interest in AstraZeneca. This move, however, had a visibly positive impact on the shareholders of the AstraZeneca as the share price rose by about 14% as Pfizer confirmed their decision regarding merger with AstraZeneca (BBC, 2014a). Strong fluctuations in the share price of both the companies during May indicate that the shareholders of both the companies suffered significant level of uncertainty regarding the merger and its economic consequences. AstraZeneca’s closing price of shares was mostly higher than previous opening price compared to that of Pfizer. It can be assumed that it indicated that shareholders supported the company’s decision to continue as a standalone company while shareholders of Pfizer desperately seek the merger so that financial and market position of the company is improved (Yahoo finance, 2014a; 2014b). AstraZeneca’s share price declined by about 11% as it turned down the proposal of Pfizer on 19 May 2014. The result was a sharp drop of £6.75 billion in market value of the company. The company however stood firm on its decision as it believed that the merger would have had negative impact on British science base and manufacturing sector. Various unions have been supportive to the company’s decision and appended to shareholders not to be lured by the offerings of the foreign rival. In this regard, the government stayed neutral in their opinion while the united assistant general secretary declared that the decision was appropriate as the move would have destabilise the company as well as pharmaceutical sector of the country. The management expect the share price to improve slowly as it was significantly affected by intense government and public scrutiny and uncertainty on the part of shareholders (Daily mail, 2014; The Guardian, 2014c; BBC, 2014a). Arrangements that will help Pfizer to lower its tax bill The US corporation tax structure has become a source of significant concern for most of the US based firms that have global access. It was also deduced from the case of Pfizer that large multinationals are planning to shift their domicile so that they can shield themselves from heavy taxes. One arrangement in this regard, which is mostly adopted by companies, is tax inversion. Corporate inversion or tax inversion is the process of relocating a firm’s headquarter and primary domicile to a low tax nation for enjoying tax benefits on its earnings while retaining its operations in the country of origin. It has already been discussed that one of the reason behind merger of Pfizer with AstraZeneca was tax inversion. The company planned to move its domicile so that it pays relatively low tax on its earnings in the UK as the corporate tax in the US is comparatively high. However, the cancellation of the proposal made the company seek new corporate inversion opportunities. According to certain sources, tax inversion is not a new strategy and has been adopted by a number of organisations such as Omnicom Group and Burger King. It was ascertained that Burger King moved the company headquarter to Canada while the largest advertising firm of the US started operating from offshore (The Telegraph, 2014; Bloomberg business week, 2014). Bloomberg business week reported further that if Pfizer moves to the UK, it will enjoy a number of benefits. It was gathered that if Pfizer moves its domicile to the UK it will pay around 20 percent tax while that in the US is around 35 percent. Additionally, the UK companies are liable to pay tax only on the profit earned within the nation. Therefore, the company will be able to enjoy tax free earnings from its foreign subsidiaries. Newest development in the UK on this regard suggests that lesser tax for UK based patents, which implies great opportunity for pharmaceuticals (Bloomberg business week, 2014). According to the Telegraph, the pharmaceutical giant has approached Actavis, which moved its domicile to Ireland in 2013 as a part of tax inversion. It was ascertained that Pfizer will be able to avail similar tax benefits in this venture as it would have if the AstraZeneca merger had taken place (The Telegraph, 2014). Rationale behind UK intervention in bidding process of Pfizer and AstraZeneca AstraZeneca is a nation asset for the UK and the government was significantly concerned about the impact of the merger on the economic condition of the country and on various business sectors. AstraZeneca expressed similar concern as the management as well as the chairman of Pfizer hinted that the merger may result loss of jobs as well as reduction in the cost of research. The management and other governing bodies were also worried about asset stripping which is a natural scenario during merger and acquisition. AstraZeneca is in the middle of development of certain crucial drugs and any changes in the development plan may have negative consequences (Cloyd, Mills and Weaver, 2003). It was observed that the chairman of Pfizer wrote personally to the prime minister of UK regarding the protection of job and investment in the country along with strengthening the British science base. However, the government is unsure if they should trust Pfizer. The reason is that, before Pfizer, Kraft Foods merged with Cadbury and promised to keep the factories, assets and jobs in the UK but they did not keep its words. Hence, the government is sceptical about the decision as similar incident will have significant impact on the UK job market (The guardian, 2014a; 2014b). Impact of Kraft-Cadbury on the government’s stance on mergers and acquisitions Cadbury was acquired by the US based Kraft Foods in 2010, this acquisition resulted in changes, and modification in the various governing rules regarding acquisition and merger of UK based firms by other foreign firms. During the acquisition process, the company promised that it would keep the Somerdale factory of Cadbury which was however closed in 2011. This situation resulted in loss of around 500 jobs. These developments hinted that it has become very easy for foreign firms to acquire or merge with their UK rivals and consequently the process has become relatively murky. The irresponsible act of Kraft Foods drew significant attention of the UK governing bodies and its incompetent approach was criticised as a cynical plot to gain control over Cadbury in a smooth manner (House of Commons, 2010). After the Cadbury-Kraft issue, the UK government intervened with the help of the Panel of Takeovers and Mergers. The panel is responsible for regulation of various merging activities and since the event of Cadbury, it made modification in the takeover code. The current takeover code emphasizes on better disclosure of the intentions of the acquiring firm so that management and employees of the acquired firm does not become victim of any kind of manoeuvre on the part of the foreign firm (BBC, 2014b). Conclusion In global business, acquisition and merger is gaining significant importance as it often deliver mutual benefits to both the companies involved therein. The paper focuses on the unsuccessful merger of Pfizer and AstraZeneca that was initiated in November 2013 and called off officially in May 2014. It was gathered in the paper, that this merger would have made Pfizer, the largest company in the global pharmaceutical industry. The paper evaluated the overall timeline of the bidding process to have a better understanding of the situation followed by share price analysis. It was determined that AstraZeneca declined the offer of Pfizer thrice citing reasons such as undervaluation and motive of tax inversion. In this regard, the paper has elaborately discussed about tax inversion and its benefits with respect to Pfizer’s venture in the UK. During the study, it was further revealed that due to high corporate tax, most of the US corporations are adopting this measure. Lastly, the paper discussed the rationale behind government intervention in the bidding process of Pfizer with respect to Kraft-Cadbury takeover and its consequences. Reference List BBC, 2014a. AstraZeneca shares soar after Pfizer confirms bid talks. [online] available at: [Accessed 5 November 2014]. BBC, 2014b. The Cadbury deal: How it changed takeovers. [online] Available at: [Accessed 5 November 2014]. Bloomberg business week, 2014. 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