The Overconfidence of Pfizer - Case Study Example

Corporate Finance Introduction Pfizer unsuccessful takeover of bid for Astra Zeneca was mainly due to the overconfidence of Pfizer. The reason for its failure was that it concentrated and prioritized more on minimization of tax and cost saving techniques. However the directors of Astra Zeneca played their role well. Pfizer efforts of six months for successful takeover of Astra Zeneca resulted in failure. The friendship deal between the New York based Pfizer and the UK based Astra Zeneca turned to a hostile one. Pfizer had undergone abandon effort for buying the UK based drug maker Astra Zeneca in spite of the opposition and restrictions imposed by the politicians, scientist of UK and also its targeted boardroom. The fair price of 55 pound a share offered by Pfizer was rejected by Astra Zeneca on the ground of undervaluation of the business. The workforce of Astra Zeneca expected that the shareholders to take their responsibility respectfully and plan out their long term strategy. Astra Zeneca was prioritizing the improvement of health and development of life sciences rather than prioritizing on minimization of its tax liabilities. The unsuccessful takeover created and aroused a hostile scenario on both the sides of Atlantic under the issue of tax saving. As the US firm considered that tax saving is an important element to be considered for the successful takeover, while the UK firm believed that Pfizer could have reallocated the tax rate for defending itself from the high rate of corporation tax imposed by US. Question a Pfizer initially proposed 53.50 pound for taking over UK based Astra Zeneca but Astra Zeneca proposed Pfizer to increase the price by 10% increasing the offer price to almost 59.85 pound to carry out the bidding process. The US based Pfizer then fierce fully increased and fixed the price to 55 pounds. Astra Zeneca the UK based firm rejected the price offered for bid by the US based firm at 69 billion pounds after six months from when the initial offering was proposed. The history of the case when the investors became aware of the new information started first on 25th of November 2013 when the chairman of Pfizer Lan Reads met and discussed with Leif Johnson the chairman of the UK based firm Astra Zeneca and proposed him the plan of merger . Then both the companies decided to meet on the beginning of next year that is on 2014. After the formal discussion conducted on 25th November 2013, both the companies met for discussion on 5th January 2014. The chief of both the companies decided to meet in New York for carrying out high level discussion. Pfizer initiated and proposed to enter into the bid by offering a price of 58 billion pounds that is 46.61 pounds per share for the UK based firm Astra Zeneca. But the UK based firm Astra Zeneca rejected its offer and declines to enter into further talks and the contract ended on January 14, 2014. Then again after 4 months the chairman of Astra Zeneca read through the terms and conditions of the contract and decided to restart the talk on 26th April 2014. But to utter dismay the chairman of Astra Zeneca did not find any systematic and attractive bid proposal and declines to discuss about mergers. Again on 28th of April 2014 Pfizer decided to declare its interest in Astra Zeneca publically and declares that it is taking into consideration both the shares and cash of Astra Zeneca at a significant premium before the start of speculation for the shares of Astra Zeneca and Pfizer also proposes to shift its domicile from US to UK so that it could generate and provide protection to its non US earnings from the corporate tax imposed by US. On 2nd May 2014 Pfizer revised its price for bidding by increasing it to 63 billion pounds or 50 billion for per share and forwarding a proposal to David Cameron insisting him to consider UK as a base for its European operations and to gain 20% of the research workforce of the merged company workforce for at least 5 years in Cambridge. Then on 4th of May 2014 Ed Miliband the labor leader of UK imposed a political pressure for the bid and blaming the government for the cheerleading of Pfizer and advised to conduct an assessment whether the takeover proposed by Pfizer is in the National interest. Next again after two days that is on 6th of May 2014 Astra Zeneca introduced a strategy for reaching a revenue target for 45 billion pounds by 2023. On 13th of May 2014, Read and Astra Zeneca chief executive Pascal Soriot developed and formed a skill and innovation group and formulated that the merger would lead to the delay of manufacture of many important drugs (Sutherland 22). On the other hand they also agreed to the fact that that the merger will lead to decrease in spending for research. On 18th May 2014, the British government conducted the public interest test and also Pfizer proposed a new bid price of 69.4 billion dollar worth of which is 55 pound per share. But on 19th May 2014 Astra Zeneca declined its offer and rejected to enter into the contract with Pfizer. Question b The rationale behind Pfizer bid is that it expected an increase in growth by undertaking innovation in the business. Astra Zeneca spent a lot on its research and development for promoting growth. Astra Zeneca has an attractive portfolio for entering into new markets and enhancement in the existing market. Astra Zeneca is on the verge of launching its new products. Astra Zeneca is mainly concentrating on the development of drugs for the treatment of the three significant areas cancer, cardiovascular, respiratory. It has also entered into collaboration with other companies for improvement in manufacture of drugs (Sutherland 19). Astra Zeneca shareholders believed that its future is brighter than that than of which Pfizer is expecting. The tax bill is less in UK. Therefore, Pfizer was willing to enter into a merger with Astra Zeneca so that the merged company will be framed according to the holding company incorporated by UK which will save the company profit from the non US business from the tax levied by US. The tax saving was the vital reason for the interest shown by Pfizer in the merger with Astra Zeneca. Pfizer believed that the merger will provide a platform for Astra Zeneca to have more bargaining power and expand its operation. Pfizer also decided to reallocate its business operation from US to UK to prevent itself from tax. Pfizer was ready to increase the price of the bid to enter into the merger but on the contrary UK government was not ready for sale of Astra Zeneca to Pfizer. The financial proposal revealed that it undervalued Astra Zeneca. Astra Zeneca had even rejected Pfizer’s second buyout offer. Pfizer main motive was tax reduction; it was no way interested in the new drug products or cost cutting techniques. Question c The stock return for both Pfizer and Astra Zeneca during the bid process is. Shares of Astra Zeneca rose by 114% when Pfizer offered proposition of merger with Astra Zeneca. The original offered undervalued Astra Zeneca. UK prohibited and puts restriction on revising its offer after finally declaring it. Pfizer could increase the value of its shares after merger. According to the public the deal could have been finalized. Share prices of Pfizer have been falling rigorously and it can be seen that there is much reduction in the price and in the recent years it has completely gone down. It is once more interested to offer price to Astra Zeneca for its acquisition. It was not only the conflict between two companies but also the conflict which involved two countries and the government also preferred to remain neutral in this case. Pfizer expectation and dreams had gone down and its strategy for tax saving was rejected. Astra Zeneca had to provide reasons for rejecting 55 pound share which comprised of a premium of around 25%. Pfizer share price had fallen by 9% after Read sold his share for $ 31.99 in February, this failure was due to its initiative taken to takeover Astra Zeneca. Many of the mergers and acquisitions are unsuccessful because the acquirer becomes overconfident that the other company will agree for the merger. The share prices of Pfizer started falling when the government of Sweden took the initiative in explaining and suggesting the UK based company Astra Zeneca to reject the offer of Pfizer merger proposition. Astra Zeneca was formed in 1999 when the Sweden based Astra merged up with UK based Zeneca and formed together as Astra Zeneca. According to the chief of Astra Zeneca, the prosperity of Astra Zeneca in drug making might have been destroyed with its takeover by Pfizer. Pfizer explained that the deal of the takeover provided opportunities for the shareholders and it is acting as driving force which is compelling them to support for the merger. Pfizer faced much criticism for making the final deal, because it was proposed by analyst that Pfizer should have kept the deal open until the expiry of its deadline. The shareholders of Astra Zeneca are very confident that it would increase the confident of the company and it can perform its operation independently. The takeover was the due to the combination of the management of both US and UK, in which the shares are listed in New York Stock Exchange. The strategic, financial transaction will impact the share price (Bailey and Clancy 36). Question d The arrangements could enable Pfizer to lower its tax bill. The corporate tax rate of US is very high, so Pfizer an US based Pharmaceutical company wants to merge its business or takeover Astra Zeneca which is a UK based firm in order to save its tax and the profit generated from its operation in non us base business will not come under the US tax rate. The US tax is considered and declared as the highest corporate tax in OECD (Kling and Eileen 36). The government of US also supported to carry out its business in UK. The US based Pfizer wants to shift its operation from US to UK after the merger with UK based company Astra Zeneca to reduce its corporate tax. Pfizer once again wants to offer price for the takeover of Astra Zeneca, Pfizer is not interested in the growth revenue, product folio or cost saving techniques of Astra Zeneca. It is only concerned about the high rate of corporate tax charged in US. But President Obama have started putting restrictions on the corporate who are migrating to another countries and carrying out their operations in other countries only to avoid the payment of corporate tax levied on them. President Barrack Obama have now laid down stringent rules and regulations prohibiting people or corporate to change and modify their address and shift in other countries. It has also been found that Pfizer have not adopted any rules or did not plan making arrangements which will help them to move away from the laws. If some rules are framed that distinguishes their opportunities of inverting. Pfizer also promised that if the deal is granted than 20% of the company combined Research and Development will be carried out in UK. Question e Kraft Cadbury is also a case of merger and acquisition by the US Company. UK now intervenes in the bid process because they feel that the rules of UK government should be stringent because it can be seen that most of the merger and acquisition in the world realizes that it is very simple for the outsiders to come and approach the UK rivals and acquire it. A panel had been established in UK for the protection of merger and acquisition of the UK based firms in September 2011. Kraft which took over Cadbury initiated at the beginning before the acquisition of Cadbury to that the Somerdale factory would remain open but now after its acquisition it is on the verge of its closure. It had created anger among the people for its conflicting view. Its reputation had come to a stake. Now in order to regain its reputation Kraft had to deliver its maximum time and effort to restore its old reputation (Barratt and Donald 32). Kraft defended itself by justifying himself that it had analyzed many factors and it was of no use keeping Somerdale open. The takeover of Cadbury was mainly initiated by the investors keeping in mind the short term profit. Therefore the panel has been formed to provide restrictions on the merger and acquisition of the UK based firms by the foreign companies. Now a days the government has laid down stringent the rules and regulations. Previously there was an advantage for the bidding companies to hide the anonymity and highlight or showcase their anonymity and as a result they tried to strengthen their position (Kaye 121). Merger and acquisition is mainly conducted between two companies to gain economies in scale and synergy in production. Consumer perception should be viewed and taken into consideration as how customer wants to perceive the two companies after their merger. But the `foreign companies mainly the US based firm wants to occupy or takeover the UK based firms only for intervening its tax structure. Conclusion Merger and acquisition is often referred to as the better way for reducing the work force of the two companies’ which reduces the cost saving of the two companies. The main motive is that the parent company should adopt the acquired company s advantages and disadvantages. But here it was found that Pfizer wants to a acquire Astra Zeneca for intervening its tax it was rejected twice by Astra Zeneca , but even now it is willing to offer high price for bidding and take over Astra Zeneca. Pfizer cannot enter into the market for bidding before six months. In order to prevent the foreign companies especially the US based company’s where the rate of corporate tax is very high from entering into UK for carrying out its operation or for merger and acquisition of the UK based firms. A panel has been formed by UK from preventing the foreign companies to take over the companies and treating merger and acquisition as a tool only to evade tax. The share price of Astra Zeneca have suddenly increased after the takeover proposal offered by Pfizer. On the contrary the share price of Pfizer has fallen by 9%. Even it can be seen that in the case of Kraft Cadbury too, the company acquired Cadbury only to evade tax. Pfizer took much initiative and modified its price for the takeover but ultimately it had to return back to US with failure. Astra Zeneca with its number of drugs in the pipeline will generate huge cash flow and revenues. Astra Zeneca alone can perform independently and earn good amount of revenue. References Bailey. David, Clancy. John, Blogs from the Blackstuff: The Case for Rewriting the Economy, Birmingham: Lulu.com, 2010. Print. Barratt. Michael J. and Donald E. Frail, Drug Repositioning: Bringing New Life to Shelved Assets and Existing Drugs, Canada. 2012. Print. Kaye, Selecting Stocks (S&P Gd.,). New Delhi. 2006. Print. Kling. Lou R and Eileen .Nugent, Negotiated Acquisitions of Companies, Subsidiaries and Divisions, United States. 1992. Print. Sutherland. K, Profile of the International Fluid Sealing Industry - Market Prospects to 2008, New York: Elsevier. 2003. Print. Sutherland. Ken, Profile of the International Membrane Industry: Market Prospects to 2008 USA: Elsevier. 2003. Print. Read More