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Pfizer and AstraZeneca: There Are No Winners Here

U.S. stocks started this abbreviated trading week on a high note -- literally -- as the benchmark S&P 500 rose 0.6% on Tuesday to another all-time high. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) gained 0.4%, with the technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) was up 1.2%.

For a value investor like me, a one-way market makes me a little nervous. By the end of next month, assuming the market remains calm, we will have gone 1,000 days without a 10% correction in the S&P 500 -- and this is already the third longest such streak on record, according to the Bespoke Investment Group. Here's another statistic I came across this morning that does nothing to extinguish my concern: According to data compiled by Goldman Sachs and Bloomberg, a basket of 50 companies that rank lowest in terms of balance-sheet quality has risen 94% since the end of 2011, outperforming the S&P 500 almost 2-to-1 over that period. Despite that performance, I'd like to remind long-term investors that favoring quality businesses with pristine balance sheets (bought at reasonable valuations, naturally) is a much easier, less time-consuming, and less stressful way to invest.

The show's over, folks! Pfizer (NYSE: PFE  ) is going home empty-handed from its hunt after it formally renounced its pursuit of AstraZeneca (NYSE: AZN  ) yesterday. According to the City Code of Takeovers and Mergers (the City refers to the City of London, a city within London and its financial district), Pfizer's statement is binding for the next six months, unless AstraZeneca were to approach Pfizer at the end of August.

A week ago, I wrote:

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.

Pfizer simply did not appear to have much taste for a fight, particularly as the deal became a political issue in the U.K. -- and, to a lesser extent, in the U.S.

For AstraZeneca, rebuffing Pfizer may have been a smart move in terms of protecting the longevity of its operations and its employees. On the other hand, Pfizer's final offer would have handed AstraZeneca shareholders a healthy premium for their shares:

Undisturbed AstraZeneca closing share price on April 17, before reports of Pfizer's interest

GBP 37.82 (1)

Average closing price over the 30-day period through April 17

GBP 38.97 (2)

Best Pfizer offer

GBP 55.00 per share

45% premium to (1), 41% premium to (2)

Highest closing price since April 17

GBP 48.24

Today's closing price

GBP 42.52

Sources: Yahoo! Finance, AstraZeneca.

However, the numbers in the table also suggest that the market never had much confidence in the odds of a successful Pfizer bid – witness the 12% discount that separates Pfizer's best offer and the highest closing price of AstraZeneca shares.

Still, I think the burden remains on the AstraZeneca board to give a better accounting of why the company wasn't even willing to sit down to begin negotiations with their pursuer. At 55 pounds per share, Pfizer's final offer appeared to offer full value -- and more! -- for AstraZeneca shares. Perhaps the firm's institutional investors will persuade the board to engage with Pfizer in three months' time, but my sense is that would come too late, as Pfizer appears to have lost all appetite for the deal.

If that is the case, Pfizer has a challenge of its own with regard to its shareholders: convincing them there is a path to growth that isn't predicated on a megaacquisition. That would be no mean feat, as M&A has been the linchpin of Pfizer's strategy for nearly 15 years.

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