Pfizers Unsuccessful Takeover of Astrazeneca - Essay Example

 Pfizers Unsuccessful Takeover of Astrazeneca The History of Pfizer’s Bid For AstraZeneca Merger and Acquisition is one of the important differentiation strategies of an organization. In the 21st century business market, organizations are constantly looking for approaches to find new strategies to promote their business and to remain profitable during a time of business competition. However, the success of merger or acquisition bid is often met by unprecedented challenges that may be unforeseen for the interested organization. Pfizer’s bid for the takeover of AstraZeneca is a good example of the business deals that have gone sour. After following a series of engagements, AstraZeneca refused Pfizer’s bid to merge the company. On 25th November, 2013, Pfizer, a US company expressed its interest to enter into a merger with AstraZeneca. This is a crucial stage of initiating a merger, where the interested party expresses for the first time the consideration for a merger. The second stage of the merger is the high level discussion in which the two parties sit down and discuss into detail the path they are going to follow in the merger. At this point, the interested company proposes its offer to which the other party may accept or reject. On 5th January, 2015, the two companies held high level talks in which Pfizer offered $58 per share (Farrell, 2014). After considering the offer, the AstraZeneca rejected the offer and the no more discussion was held after January. The step of Pfizer to go public on its interest to merge with AstraZeneca on April 2014 is an important stage of the merger. The main purpose of this stage is to draw the public assessment into the merger and consider the logistics behind its association. At this point, other multinational companies have the opportunity to consider the offer evaluate and criticize it. The national government also is called at this point to intervene in merger and to consider whether the offer is to the public’s interest. From this point, the leader of the company engages the parliament before the science and technology committee to further negotiate on the offer. Later on, the company offers a higher bid and promises to give $69 per year and to absorb about 20% of the researchers for at least five years (Farrell, 2014). At this stage, AstraZeneca has an opportunity to reconsider how this offer would affect their business. The CEO of the company needs to obtain information on how the merger would benefit its company and how his management would achieve their goals. The fact that the company rejects the offer at this stage shows that the company is bound to lose from the bond. On 18th May, 2014, the UK government became interested to consider the offer by considering amending the terms of public interest test (Ahmed, 2014). The public interest test requires that ministers reject takeovers where there exist a national security issue and unhealthy completion. The government’s intervention in a merger is a crucial stage of a takeover process since it has the mandate to provide laws regulating company merger procedures. All companies must adhere to the regulations of the government while considering any merger (Farrell, 2014). Therefore, the legal information is crucial for multinational companies, especially at a time when a company want to expand their business into new markets. Finally, AstraZeneca rejected the last of Pfizer on the basis of its impact on the organizational structure. This is a good example of a failed merger due to the unwillingness of the management to accept the takeover. The Rationale for Pfizer’s Bid AstraZeneca is the second biggest drug company in the UK with its headquarters based in London. Pfizer’, in proposing a merger with AstraZeneca seems to launch a multi-dimension strategy to differentiate its business. To begin with, Pfizer is interested in developing its pipeline of cancer treatment by acquiring shares in the company. The rationale of the company is to expand its company profits by associating with a UK based company. The choice of AstraZeneca as a potential business partner is a well-thought decision (Busfield, 2003). The company understand the value of partnering with the right company to stimulate its own growth. Pfizer intend to enter into this market through a merger, which is one of the ways that companies reduce business risk while venturing in new markets (Tarrant, 2011: Sonenshine, 2011). By associating with one of the biggest medical company like AstraZeneca, it is likely that the company will survive in the new market. The expectation is that the company would invest not only in a new market, but also launch a new product altogether. Therefore, the company is bound to generate more income for its company without much risk of business failure. On this ground, the idea of Pfizer is positive strategy that would provide a chance for the US Company to grow. Another important rationale for Pfizer’s move is the concept of tax inversion, a strategy that multinational companies employ to ensure that they optimize their profits by reducing their tax remittance. The intention of the CEO of the company is to find a new market where they would invest the profits that they accrue outside US. The idea is to ensure that the company avoid the high tax rates that US imposes for foreign investment. The US charges 40% of income from non-US organizations as one way of encouraging business investment in the US. Contrary, the UK charges about 21% tax and this bound to drop to 20% in the near future (Steuerlen & Urban Institute, 2008). On this note, Pfizer will pay less tax and hence its income is bound to rise after the partnership with the UK based company. In addition, the company intends to relocate its headquarters in UK to ensure that its tax remittance further goes down. Multinational companies have to survive at a time at the height of business competition and reduced profit margins. The effort Pfizer to reduce its expenditure as a strategy to optimize its profit margins is a wise decision that is centred on strong management decisions. However, the failure of the merger can partly be blamed on the company’s unsatisfactory offer to the UK based company. Since the company will have a big reap if the merger goes through, it would be necessary for the company to give an attractive offer to AstraZeneca to convince them. One important aspect of a merger is that at the end of the negotiation every partner is satisfied. AstraZeneca rejects the offer after considering that the company’s merger strategy would result to the fall of research, which is likely to affect the innovativeness of the company. To overcome this barrier it would be considerable for the company to offer to maintain the research team. This way, the UK giant company would consider the deal as attractive and satisfying (Tarrant, 2011). Although it is clear that the management of the target company is unwilling, it would be easier to influence the company if the deal satisfies their demands. On the other hand, the UK company seems to be unwilling to enter in the merger as depicted by its unwillingness to negotiate even when the issue of the second offer. This is a clear example of how mergers fail even when the rationale for entering the merger is founder on wise decision making. Stock Returns for Pfizer and AstraZeneca The stock returns refers to the organizational profit accrued and any dividends that are awarded to the shareholders. While considering any strategic plan of an organization, it is crucial for an organization to consider the impact that its actions would have on the shareholder’s value. Every company has a role to make the best deals on behalf of its stakeholders to ensure the shareholders of the company are satisfied (Sherman, & Sherman, 2011). While consider a proposal for a merger, a company should be able to measure its share value to ensure that they enter into a partnership that adds value to the shares of the company. To do this, the company management needs to estimate and predict its stock returns to ensure that the company remains stable after the merger. In this case, it was crucial for both Pfizer and AstraZeneca to consider the stock returns before engaging in a negotiation process. At the time of the expression of interest, Pfizer offered the UK Company a £46.61 a share, an offer that was rejected by AstraZeneca. At this time, the company stock returns value amounted about £35 but had the potential to grow even further. The company rejected the offer on the basis of the risk that it would subject to its shareholders and on the ground that the offer was too low. The company was confident that it would be able to generate higher profits without putting its shareholders to the risk that come along with Merging with the US multinational. This shows the keenness of the company in safeguarding the welfare of its members. By the time Pfizer decided to publicize its interest in the takeover, AstraZeneca’s share returns had risen to £38. By the time Pfizer renewed its offer and invited AstraZeneca to accept a return of £55 per share, the company shares value had risen to £ 48 per share (Wearden, 2014). On this ground, the UK multinational rejected the offer and invited the company to make a higher bid for negotiation. On this note, the growth of share return of the company positively affects the price of the bid. According to the principles of business, the share value of a company depends on its potential to grow and remain stable not only in the short but also in the long-term. Consequently, the dynamics of the company stock returns influence the merger terms and the worthiness of the deal to the shareholders. A controversy emerged near the end of May when the AstraZeneca’s share valued dropped to £41.1 a share within a week (Wearden, 2014). This negative growth of the company reflects the inability of the UK Company to remain profitable in the long term. However, it is apparent that the share returns of the US Company were bound to go down. In February, Pfizer chief finance officer and the chief executive officer sold shares worth $10.6 million and $8.9 million. This is implies that the company’s share value had considerably decreased (Sherman & Sherman, 2011). In addition, it explains why the company was able to make a higher offer to AstraZeneca. From this point of view, it was crucial for the target company to make a thorough stock analysis before entering into a merger partnership with Pfizer. Although the offer could have higher share returns, it is unpredictable whether the company would remain stable in the long run. However, it is clear that the conditions of the merger highly depended on the accounting returns of the relevant companies. Pfizer Tax Inversion Strategy In the contemporary business environment, harsh market conditions have compelled investors to reinvent new strategies to optimize their profits by cutting on their expenditures. As the market becomes very competitive, the companies have to lower their selling price, which reduces their net profits considerably. Tax is one of the critical expenditure that most multinational corporations have had to deal with. Countries such as US charge about 40% tax on the organizations profits, which has become undesirable for many investors. While tax is part of an organizations corporate responsibility, it is clear that during harsh periods of business it may be a limiting factor for business (Mandl, 2009). Consequently, the organizations have sought to evade tax while still remaining within the legal limits. Tax inversion is one of the strategies that many US companies have deployed to ensure that they minimise their tax expenditure. Tax inversion refers to the relocation of business to regions of lower taxation to ensure that a company’s tax expenditure remains minimal (Zuckerman, 2014). Currently, over 50 American companies have moved their businesses to other region where the tax rates are tolerable. For instance, the Burger King Company relocated its business to Canada where the tax rate is 9% lower than that in the US. Pfizer intention to enter into merger with a UK company is to escape the high tax rates in the US and profit from the low tax rates in the UK. As opposed to the 40% tax rate in the US, the company would enjoy 20% tax rate that would guarantee less expenditure (Neate, 2014). The main objective of this tax inversion is to ensure that the company can invest its cash from abroad in a country where the tax rate is considerably lower. Pfizer acquires about $63 billion cash from its investment abroad that the US taxman subjects to a 40% tax rate. If the merger goes through, the Company would invest this income in the UK, hence avoiding the high US tax rate. From an accounting point of view, the company would save about 20% of $63 billion shillings which amounts to about 2.5 billion shillings. However, the company has to pay a high merger cost if the company has to invert its tax remittance. To take advantage of the tax inversion strategy, Pfizer needs to put an effective strategy to ensure that it remains profitable in the long run. In the short-term, the company is bound to incur losses due to the new financial investment in the UK. To reap from this merger, the company should consider relocating its headquarters to the UK to hasten the process of regaining returns. This way, the company would appear as UK investor that has expanded to US. Since US is the only country that taxes money that companies have invested abroad, it would be beneficial for Pfizer. Secondly, it is crucial to take advantage of reducing tax rate in the UK, as opposed to those in America that have stagnated for many years. The US government has intentions to reduce its tax rate by 1% by the year 2015 (James, 2009). Consequently, Pfizer’s is sustainable not only in the short-term but also in the long term. By the year 2015, financial predictors state that the UK corporate tax rate would go as low as 10% (Neate, 2014). By considerably reducing its tax bill, the company is bound to experience an increase in its profit if the merger goes. From this angle, it would be recommendable for Pfizer to reconsider its merger deal with AstraZeneca. UK Government’s Stance in Merger and Acquisitions The business market is subject to the rules and regulations that the state government develops to control the business approaches within its state. In the UK, the government has a role to play in ensuring that all the businesses conducted within the country are healthy and contribute to the wellbeing of the nation. Specifically, the UK government has applied a flexible set of regulations to control mergers and acquisitions. The government regulations may serve to protect its public and investors or encourage foreign investors. Previously, the UK laws provided the foreign countries with a lot the liberty to provide scanty information and to remain anonymous while negotiating for mergers with local companies. Consequently, the UK based companies fall prey of the US companies that intended to differentiate into the UK through merger and acquisition. In addition, the foreign companies neglected their corporate social responsibilities, which consequently affected the economy of the country. The merger between Kraft and Cadbury is one of the partnerships that sent the UK government to rethink their regulation of the merger and acquisition regulations. In the Kraft-Cadbury deal, Kraft promised to maintain one Cadbury’s stores open at Bristol. However, the company reversed this agreement and decided to close the store one week later (Morris, 2014). As a result, the employees of this store lost their jobs and the public lost the service of the store. This was a clear sign that the government’s laws were unbinding and had little control of the behaviour of foreign investors. On this note, the government revised its laws to ensure that foreign companies intending to merge or acquire UK based companies are regulated (Demirbag & Tatoglu, 2007). The main objective of the revision was to ensure that these new investments did not reduce the labour force or impact negatively on the UK public. In addition, the country required to empower the local companies to have higher bargaining power while negotiating for a merger or acquisition as part of protecting the local investors. Consequently, the UK government introduced new laws to regulate mergers and acquisition procedures. To begin with, the government stated that it is a requirement for every company that intends to enter into a merger to disclose the intentions of its investment with details of its plan. Unlike in the previous laws, the companies had to disclose their names before making an offer (Morris, 2014). This empowered the local companies to evaluate their potential partner and hence possess a higher bargaining power. Next, the government demanded that every foreign company disclose its impact on the labour force and how it would contribute to its corporate responsibility. These laws empowered local companies and reduced the bargaining power of the US companies. In the failed merger of Pfizer and AstraZeneca, Pfizer had a higher bargaining power. AstraZeneca had to disclose the intentions of tax inversion and it identity before the merger negotiations. The UK multinational had the power to negotiate for the plight of its employees even after the US Company offered 20% of the labour force in UK for at least five years. This would assure that the company employees would be retained long enough to look for new jobs. Also, the company employees and shareholders had to give their opinions on the mechanics of the merger if at ill it would happen (Ahmed, 2014). The ability of the UK to revise its laws has reduced the number of potential predators that had seen UK companies as easy to partner with. AstraZeneca appears to be a beneficiary of the new UK laws that empower the local investors. Bibliography Ahmed, K., 2014. AstraZeneca Rejects “Final” Takeover Bid from Pfizer. Available at: < http://www.bbc.com/news/business-27466278 > Ahmed, K., 2014. Pfizer: What Will Government Do? < http://www.bbc.com/news/business-27187215 > Busfield, J. 2003. Globalization and the pharmaceutical industry revisited. International Journal of Health Services, 33(3), 581-605. Demirbag, M., Ng, C. K., & Tatoglu, E. 2007. Performance of mergers and acquisitions in the pharmaceutical industry: a comparative perspective. Multinational Business Review, 15(2), 41-62. Farrell, S., 2014. 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