Why Is Pfizer Walking Away From AstraZeneca?

U.S. stocks began the week on a positive note, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) rising 0.3% and 0.1%, respectively, on Monday.

Today was merger Monday, following Dow component AT&T's (NYSE: T  ) Sunday announcement that it's acquiring DirecTV (NASDAQ: DTV  ) in a deal valuing the latter at $95 per share. However, the market's reaction to the deal, as captured in the stock prices of acquirer and target, suggests a healthy dose of skepticism, which may have created an opportunity for investors who wish to speculate on whether the companies manage to complete the transaction.

Still, that deal looks a lot more likely than an even bigger one, which now looks moribund: Dow component Pfizer's (NYSE: PFE  ) $119 billion offer for AstraZeneca (NYSE: AZN  ) . Pfizer's chosen modus operandi in its pursuit prompts us to ask why it's taking no for an answer from AstraZeneca and effectively walking away from the deal. This specifics of this situation are a bit complicated, so I'll lay out my case in a Q&A format.

What is Pfizer's latest offer for AstraZeneca?
On Sunday, Pfizer disclosed that it had made a final 55-pound-per-share cash-and-share offer for AstraZeneca, a 45% premium to AstraZeneca's "undisturbed" share price on May 2, but less than the 10% premium to its previous "final" offer of 53.50 pounds per share that AstraZeneca had requested.

Let's get this straight: Is this really Pfizer's final offer?
This time around, Pfizer has stated that "this proposal is final and will not be increased." Under the UK's takeover code, Pfizer must abide by this statement. Pfizer now has until May 26 to convert this into a firm offer (i.e., a formal bid), but it will not do this without the approval of AstraZeneca's board; in addition, Pfizer explicitly said it will not pursue a hostile offer. AstraZeneca publicly rejected the offer on Monday.

What was Pfizer thinking?
Pfizer may have thought AstraZeneca's investors would pressure the company to sit down with Pfizer. However, the immediate rejection of the offer suggests AstraZeneca has canvassed its largest shareholders and is comfortable with its position. Besides, I believe Pfizer has lost its enthusiasm for deal: Witness its decision to rule out a hostile transaction.

Why not go hostile?
Pfizer's final offer looks limp-wristed. By taking the possibility of a hostile offer off the table, Pfizer was just begging AstraZeneca to reject its offer. Frankly, I think Pfizer is relieved to have the opportunity to walk away from a situation that has turned into a bit of a public-relations fiasco.

What public-relations fiasco?
When AstraZeneca CEO Leif Johansson said today that Pfizer's proposed transaction "appears to have been fundamentally driven by the corporate financial benefits to its shareholders of cost savings and tax minimization," he was pressing where it hurts. It's quite true that one of the main drivers of the takeover was its "inversion" feature, which would have allowed to Pfizer to switch its tax domicile to the UK, thereby significantly lowering its tax rate. That has generated an enormous amount of attention -- and criticism.

Furthermore, the deal had taken on a political dimension in the UK, with some opposition politicians expressing concern for the continued health of one of its "national champions" in research and development. To be sure, Pfizer's record on acquisitions does raise some concerns in that area, and its CEO, Ian Read, could offer no concrete reassurances when he stood before the English Parliament. As such, the political and media climate would only have compounded the challenge of mounting a hostile campaign.

What's next for Pfizer on this front?
Once the May 26 deadline expires, Pfizer must wait another six months to put another offer forward for AstraZeneca. Given the difficulties I've described, I think it's highly unlikely to do so, particularly as the U.S. Treasury Department proposed in March tighter rules for tax inversion deals that would take effect next year. Pfizer's ambitions with regard to AstraZeneca are dead, and there is little likelihood of resuscitating them.

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  • Report this Comment On May 20, 2014, at 12:40 AM, smurfffool wrote:

    The reason Pfizer walked away is because the deal was too expensive - PERIOD. The rest of your article is excess. As a PFE stockholder, I approve the walkaway. And the market seems to agree with me as AZ drops 12% - I guess they aren't as valuable as they think they are. Remember, you are only as valuable as someone is willing to pay. You can jack up the numbers and run the spreadsheets all you want but if someone isn't willing to pay the price, economics sez you will have to drop it. AZ will eventually get bought out - not by Pfizer and at a lower price than Pfizer offered.

  • Report this Comment On May 20, 2014, at 8:39 AM, TMFAleph1 wrote:

    @smurfffool

    Thanks for your comment, but your hypothesis that the deal was too expensive doesn't explain why Pfizer refuses to go hostile with its current offer.

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