When I got wind of the $160 billion mega-merger of pharmaceutical colossi Pfizer Inc. (NYSE: PFE) and Allergan PLC (NYSE: AGN), two thoughts sprang immediately to mind. One conjured the sage words of a college finance professor, who said, “Economics should always supersede taxes in financial decisions.” The other was a 2011 Harvard Business Review report that estimated the failure rate for mergers and acquisitions ranges between 70% and 90%.
I can’t say unequivocally whether the cart was leading the horse in the Pfizer-Allergan deal, but it sure appears that way.
Technically, Pfizer will be combined under Allergan, though the combined companies will be renamed Pfizer PLC. The change to PLC from Inc. matters. The new Pfizer will be domiciled in Ireland. Pfizer says the Allergan hookup, combined with its new Emerald Isle digs, will drop Pfizer’s effective tax rate down to 17% from 25%. Based on Pfizer’s math, it will save about $1.2 billion in taxes in 2017.
I’m all for saving on taxes, but economic value must still lead the charge. Pfizer’s track record on mega-deals and value creation leaves much to be desired. Results tack closely to the Harvard Business Review failure estimates.
I say that because I’m still waiting for the synergies and value to materialize from the last mega-deal: Pfizer’s $68 billion takeover of Wyeth in 2009.
At the time of the Wyeth deal, Pfizer shares were trading below $20. Today, they trade in the low $30s. That’s a 10% average annual rate of share-price appreciation, which isn’t bad. That is, it isn’t bad until you consider that in 2009 most stocks were trading near multi-year lows. Part of the Wyeth deal was financed with Pfizer’s discounted stock.
But it was the vaunted Pfizer dividend that took it on the chin for Wyeth. The dividend was slashed in half to provide the required cash to see the deal through. The dividend has yet to reclaim ground lost.
Pfizer’s share price has also failed to reclaim ground lost if the horizon is extended.
Pfizer shares were trading in the low $40s in the late 1990s and early 2000s. Both Warner-Lambert and Pharmacia were brought into the fold between 2000 and 2003. Both deals were doozies. The Warner-Lambert deal was valued at $90 billion; the Pharmacia deal was valued at $60 billion.
Here’s what then Pfizer Chairman William Steere Jr. had to say about the Pfizer/Warner-Lambert combination in 2000: “Pfizer and Warner-Lambert represent a new competitive standard for our industry. By combining two world-class organizations to create the fastest-growing major pharmaceutical company in the world, we are positioned for global leadership.”
Pfizer had revenue of $51.3 billion in 2005, the year after Warner-Lambert and Pharmacia were fully ingested. Last year, it had revenue of $49.5 billion. In 2005, Pfizer shares topped at $29 a share. This year, they topped at $35. One can only wonder where all the fast growth materialized.
Interestingly, the Allergan deal is being peddled by bullish analysts as way to facilitate Pfizer’s desire to get smaller. (Get fat to get skinny; get dumb to get smart?) Adding Allergan’s products – led by the face-freezing Botox – to Pfizer’s development pipeline would provide the scale to form a new entity that would trade at a higher multiple, so the rationale goes.
I’ve heard all this happy talk about synergies, market potential and value creation before with Pfizer, and yet nothing has materialized. Of course, this time could be different, but I’m not holding my breath. After 15 years of wheeling and dealing, all Pfizer has to show for its activity is a reduced share price and a reduced dividend payout.
As for the post-Allergan dividend, Pfizer provided limited details on dividend policy, though it appears the current Pfizer dividend policy will hold for the time being. This is good news for income investors, considering Allergan pays no dividend.
But don’t count the dividend checks quite yet. I wouldn’t be surprised if a new “smaller” dividend policy emerges. It’s not like it hasn’t happened before.
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