The Main Rationale for Pfizers Bid - Coursework Example

PFIZER – ASTRAZENECA MERGER By + Executive Summary This paper particularly looks at the events surrounding the Pfizer – AstraZeneca Merger that was unsuccessful. Pfizer is a US domiciled company that launched several unsuccessful bids to acquire AstraZeneca that is based in the United Kingdom. The merger sparked a lot of public interest especially after the Kraft – Cadbury merger. The main area of concern was the impact of foreign takeovers of United Kingdom industries and whether they affect the markets, labor and local social fabric involved. The main rationale for Pfizer’s bid was to lower its tax bill by moving its non United States operations to the United Kingdom, which has a lower corporate tax rate as compared to the United States of America. The shareholders had mixed feeling on the merger and the boards finally rejected all the bids. When considering a takeover bid, the board must have looked at the intentions of the acquiring company and how it would impact the workers, suppliers, scientists and the United Kingdom public at large. They found that they could not guarantee that all their stakeholders’ interests would be guaranteed by the company taking over. Moreover, there was an increased sense that there was conflict of interest by the board members of Pfizer as they would greatly benefit from the merger and the news of a possible merger had increased the company’s shares and they eventually sold off significant amounts of shares. The shareholders and other stakeholders must be given accurate information such as the United Kingdom government before a decision is made. The British parliament intervened to ensure that the merger is in the interest of the public of United Kingdom. a) Historical Merger Bid Timeline The merger bid by Pfizer was initiated in the November 2013 by then only the two top executives were involved in the merger. However, even before then the company had expressed its interest in acquiring a European company as a way of carrying out a corporate inversion strategy to safeguard its earnings from non US markets. This was after unsuccessful attempts to convince the US legislature to revise the tax code (bbc.co.uk). The company is not the only US Company to be involved in such arrangement. Other pharmaceutical companies have done so in the past and the speculators must have been very much aware of the intentions of the company to enter such an arrangement. This is reflected in the price movement of the stock once the initial negotiation was made by the company to the targeted company in the November 2013. The public is usually made aware of company intentions through official communications from the companies and their subsequent evaluation through various critics. The assumption made is that the investors are rational and base their investment decision only on the information available on the public domain and therefore the price fluctuation of the stock market are a reflection of reactions to various news and information provided through public disclosure of both companies through various media platform both formal and informally. In the final bid to have the merger that was in May, the investors must have been well aware of the negotiations due to the public interest that was elucidated by media and even parliamentary interest (bbc.co.uk). These led to the stock market being quite volatile during the whole of May 2014 when the highest bid was made and later rejected on the 18th of May 2014. This particular merger could be termed as hostile as the board of AstraZeneca did not seem satisfied with the bidding company in more ways than one. b) Pfizer’s Rationale for the Merger Bid The taxes imposed on companies in United States seems high, the reason which has led to many of the US based companies to try and shift their operations to other countries to lower tax exposure on their revenues taxable in the United States. This process or transaction is normally referred to as tax inversion. This is usually a transaction used by a company in which it becomes a subsidiary of the new formed parent company in a different country for the sole purpose of ensuring it falls under beneficial tax laws. This is mostly used by companies in the United States moving to lower tax domiciles such as Europe or Caribbean tax havens. This rationale has led to the decrease of the World’s largest companies domiciled in the US from 17 of the worlds’ 20 largest companies in 1960 to about six that are domiciled there in 2014. This aspect has led to a lot of political debate in the US legislature on the need for corporate tax reforms that would be more favorable to the companies operating in the territory. The United States has also put stringent measures to prevent tax inversion by companies who set up shell companies for purposes of lower tax band exposure in overseas holding companies. Prior to 2003, any US company could have just created a new headquarters in a foreign company making the US operations a subsidiary and would benefit from the tax laws but this has been amended to ensure tax is not lost from such companies (bbc.co.uk). The Pfizer – AstraZeneca merger is not the only tax inversion attempt that has happened in the recent past. The US based advertising company Omnicom has decided to move its operation to Netherlands after merging with Publicist which would cost the company some $35 Billion and result in a net savings of about $80 million in US tax annually. Another US company Liberty Global acquisition of Virgin Media estimated at $23 billion would enable the America Cable group to move its domicile to UK and hence pay a lower corporation tax rate of 21 per cent as compared to 35% charged in the United States of America. For the shareholders of Pfizer the merger would be beneficial as the company will have tax savings that would lead to higher earnings per share and possibly higher dividends per share. In capitalism, the corporation’s main aim has always been to maximize shareholder value through ensuring maximum profits are made and retained by the company. Taxation posses the greatest cut to profits for corporations and off shore mergers are increasingly becoming popular. The American corporations have also tried to lobby for reduced corporation taxation that would allow companies to keep more their profit arguing that it would increase the amount of capital in the economy and thus spur even more economic activity. In their arguments the increased economic activity would pay up for the cost of reduced tax obtained by the country. This was the reason the Pfizer Company advocated for reforms in the tax policy of the America though it said it did not rule out tax inversion as an option in the short term. This was made true by their numerous bids to acquire AstraZeneca. If the merger were to be successful the company would merge with the UK pharmaceutical to form a new outfit that would become the parent company of the US based operation. This therefore means that the company being domiciled in the United Kingdom would be subject to lower tax rate bands as compared to the United States. This is mainly with regards to revenue generated outside of the United States, which will be taxed by UK corporation tax rates. Another way in which the company could improve its tax leverage is by transferring the revenue generating activities to the new company in the UK while the expenditure related activities are retained in the United States. Activities that involve a lot of expenditure such as research and development could left in America while production, sales and distribution could be transferred to the UK where the revenue generated would attributed to the UK “parent company” that is taxed at a lower rate and hence saving from the tax reduction. These kinds of inversion transactions are popular with biotechnology and pharmaceutical companies since a majority of their value is based in intangible assets that are tax mobile. Other recent examples of similar transactions include Valeant pharmaceutical’s merger with Biovail of Canada and Endo health solutions merger with paladin labs also from Canada. Among the popular destination for companies include Ireland, UK and Europe in general. c) Stock Performance During the Bid Process The analysis below shall look at the performance of th both the Pfizer and AstraZaneca over the bidding period. A merger has different effects on both the buying company and the targeted company. For the targeted company, the share prices increase as the possibility of above market prices being offered are contemplated by investors. It the first chart showing the stock prices it can be noted that the stock prices of AstraZaneca gradually and steadily increased as from November 1 when the initial bidding was made. Another significant hike in price was in may 18, 2014 when the highest bid was made by the american company. On this particular date, the stock prices went higher as the investors speculated the posibility of the company getting into the merger. This was however, not the case as they eventually declined the proposal which led to a gradual decline in the stock prices. Overall the company stock prices led to many investors knowing more about the company and the potential it has which led to its realization of its market value. The investors became more confident in its future as a pharmacautical company as other stakeholders which boosted their brand value. The key dates where we see significant changes in prices include days where there were bid offers such as may 18, 2014, november 2013. Also when the decisions were made to reject the prosal affected the daily fluctuation in prices of the target company. The news involving the mergers such as when there were appearances to the UK parliament and the public announcements also affected the stock prices., http://finance.yahoo.com/q?s=AZN.L&ql=0 As for the pfizer inc the stock prices remained fairly stable with significant fluctuations as expected. On the 1st of November 2013, the company stock gained significantly with the news of a possible acquisition of astrazaneca. Investors speculated that such an acquisition would lead to increased earnings per share and thus more dividend. Therefore in their valuation the stock price would be higher resulting in better capital gains over a long period of time.In january 2014 the astrazaneca board rejected the bid proposed by pfizer which resulted in its shares plumiting significantly. Another significant shifting in the price of the pfizer inc was in May 2014 when it made an even more expensive bid to acquire the target company. The week before the bid was made showed some renewed investor confidence fueled by the notion that a higher priced proposal had better chances of being accepted. However, when it was rejected, the companystock moved downwards to pre merger process prices. Afterwards the company shares have fluctuated mainly because of media news that affect how the investors react. The market prices are largely driven by emotive factors rather than basic economic fundamentals of demand and supply. http://finance.yahoo.com/q?s=PFE&ql=1 d) The arrangement that would lower Pfizer’s tax bill Pfizer is a multinational pharmaceutical based in the United States with operations across the globe. This means that its revenue comes from many different countries as well as from the United States of America. Since the company is domiciled in the united states it income earned abroad is also subjected to the United States Tax code. In comparison with many other developed nations the US tax code is usually higher than in other countries. This has generated quite some debate in the American legislature but the idea is proving more complex that a revision of the tax code is not easily coming by. This has led to some companies to practice what is termed as tax inversion or corporate inversion as a way of reducing their tax base by transferring their income earned abroad to a different company domiciled in the outside the united states of America. This similar arrangement would have been possible if the merger between Pfizer and AstraZeneca would have materialized. In general, this arrangement is a form of tax avoidance, in which companies can legally avoid the payment of taxes. As other companies this decision is driven by a myriad of factors but majorly the unfavorable tax code that imposes a higher tax code on profits earned on overseas operation by US companies. This tax code is usually higher than most other developed countries which provides an incentive for the companies to characterize themselves again in form of foreign corporations so as to return higher returns on foreign earnings to their shareholders without the suffering the possibility of double taxation. According to the economist, the main incentive for inversion is that American corporations domiciled in the US would pay a tax rate of about 39% regardless of where they are earned –a rate that is higher than any other developed country. Conversely, when a company restructures and becomes a foreign entity through a merger, it inverts and it does not owe the US tax on its foreign profits but only will owe tax only on its America operations. Generally, if the arrangement were to be successful the Pfizer Company would have merged with AstraZeneca to form a new entity that would become the new parent company. The company would then move its headquarters to the United Kingdom and thus making the US operations a subsidiary of the UK based company. This would mean that all income earned from outside of the US would now be taxable under the United Kingdom tax code. Only Income earned by the US subsidiary would be subject to taxation under the United States Corporation tax code. This most likely would represent a significant reduction in the tax burden to the company since most of its taxable income would be taxed at lower rate as compared to when its wholly taxed in the United States. Another arrangement that can be made to reduce the tax burden is to reduce the amount of revenue taxable by concentrating on the expenditures in the United States Subsidiary. This is mainly because pharmaceuticals have a high percentage of intangible assets. Therefore efforts to develop these intangible assets can be concentrated in the United States but shifted to the headquarters once complete. This would practically mean that profits earned in the US are reduced by research and development costs and hence reduce the taxable income. This arrangement allows for the intangible assets to fetch maximum revenues in the more tax friendly headquarters and hence more income is retained by the companies for the sake of the stockholders. e) Reasons for UK intervention in the Merger After the Kraft Cadbury merger that was successful there was a renewed interest in the way foreign companies are allowed to acquire British companies. There were concerns that the foreign companies were merely interested in making profits at the expense of other factors of the society such as loss of jobs. There were also concerns as to whether the companies making those particular bids had the best interest of the public at the centre or it was only for the benefit of the company’s shareholders and directors (ft.com). The United Kingdom’s government was involved in the merger due to the fact that a merger of the magnitude had raised public interest. There are several concerns that fueled this intervention and majorly was the recent merger between kraft and Cadbury. After this merger there was a lot of debate about concerns that it was increasingly easy for foreign companies to buy local companies at their own terms. The events surrounding the Cadbury kraft merger led to the reevaluation of the panel of takeovers and mergers, which is the arm tasked with deals with mergers in UK. The panel of takeovers and mergers made some significant changes on the laws regulating mergers and takeovers in September 2011. The major changes were aimed at increasing the bargaining power of the target company and also compelled the bidding companies to disclose more information regarding their future intention especially with regards to employees. The government is involved in regulation majorly since it wants to protect its labor force. The AstraZeneca Company is one of the largest pharmaceuticals in the UK and provides quality jobs to thousands of Britons and other skilled scientists. The company also is one of the largest spenders on research and development. Therefore, the company is seen by the public as key in the development of long term science and the industrial base of the economy. After the Cadbruy – Kraft merger, the new company went back on its word and closed the Somerdale factory which was badly received by the public. This event brought more skeptics’ about the integrity and accountability of the bidding companies to the general public. The issue regarding foreign takeovers became an election issue after the Kraft Cadbury merger. Another key area of concern is the fact that the company is a key player in the development of science through its research and development activities. It’s the single largest funder of science in the United Kingdom; therefore the panel for takeovers and mergers would be interested in evaluating the impact of this merger on this all important field. In this edge, the wealth of nations is based on information which comes in different aspects such as new patents, trademarks and other intangible assets. The government of the United Kingdom would like to ensure that its science continues to develop and even increase significantly. This is why the parliament was particularly interested in ensuring that the merger would not adversely affect the British science especially causing a brain drain of quality research jobs based in the United Kingdom (publications.parliament.uk). Lastly, the other concern that the government could have on the proposed merger is the probability of loss of wealth due to repatriation of profits to a different country. Since the company is foreign the profits would be repatriated back to the mother country and this would have significance in the economy of the country as AstraZeneca is a big corporation. The government through the regulators and parliament had to make sure that all factors ensure that there will be win-win situation where British jobs are protected, the long term development of science is maintained and the industrial base of the country would not be affected by the proposed merger (Davies & Lyons, 2007). Conclusion In conclusion, the unsuccessful merger between Astrazeneca and Pfizer Inc is a classic example of the changing business environment in the multinational world. Mergers and takeovers serve many different purposes such as expansion into new markets or creating access to more raw materials. However, in the recent past there have been mergers aimed at reducing the tax burden especially for US based companies. These companies transfer their operations to other countries with the aim of reducing the tax liability on revenues earned outside of the United States. The bid by Pfizer was aimed at such a tax inversion arrangement that would see the company’s revenues outside of the United States taxed at a much lower rate in comparison to the US. The merger was deemed hostile as the target company’s board was not willing to accept the idea due to various reservations. The government agencies also were not enthusiastic about the planned merger as indicated by the inquiries by the parliament and media into the planned transaction. This was further exaggerated by the recent merger between Kraft and Cadbury where the bidding company never kept its post acquisition promises to keep the Somerdale Cadbury factory. The government was therefore interested in ensuring that British jobs are not lost and British science would continue with the planned merger. References DAVIES, S., & LYONS, B. (2007). Mergers and merger remedies in the EU assessing the consequences for competition. Cheltenham, UK, Edward Elgar. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&A N=218978. http://www.bbc.co.uk/news/business-27187215 http://www.bbc.co.uk/news/business-27258143 http://www.publications.parliament.uk/pa/cm200910/cmselect/cmbis/234/234.pdf http://www.ft.com/cms/s/0/f7f00654-39ca-11e4-83c4-00144feabdc0.html#axzz3DYItqmrh http://www.bbc.co.uk/news/business-27466278 Read More