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Merger Monday: The AbbVie/Shire Saga Continues

As we begin an abbreviated trading week due to the Independence Day holiday, U.S stocks are little changed on Monday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.14% and 0.08%, respectively, at 10:15 a.m. EDT. In contrast to the lack of volatility in the stock market, the mergers and acquisitions arena has picked up dramatically this year, with the Financial Times reporting that the value of global M&A rose 75% year on year in the first half of 2014, to $1.75 trillion -- the highest volume since 2007. The total value announced in the U.S. is also up by three-quarters over the same period last year. This comes as no surprise to someone who comments on the financial headlines every day, and no sector has seemingly been more active than health care -- as an example, take the latest development in the contest that pits U.S. biopharma AbbVie (NYSE: ABBV  ) against Shire (NASDAQ: SHPG  ) .

Source: Wikipedia.

Here's where we stand so far: Ten days ago, AbbVie, which was spun off from Abbott Laboratories last year, announced that it had approached U.K.-listed Shire with a cash-and-share merger proposal that it sweetened twice, with the "final" offer worth GBP 46.26 per share. Under the British City Code on Takeovers and Mergers, the announcement leaves AbbVie until July 18 to make a formal bid or withdraw for a minimum six-month cooling-off period.

Shire's attraction for AbbVie is twofold: First: growth. AbbVie's Humira rheumatoid arthritis drug, which accounts for 60% of company revenue, is going off-patent in at the end of 2016. Second: taxes. AbbVie said it will move its tax domicile to the U.K. if it is successful in acquiring Shire, implementing a so-called "tax inversion." The inversion would produce multiple tax advantages on multiple levels (readers will recall this was one of the driving factors behind Pfizer's failed GBP 69 billion bid for AstraZeneca).

Properly motivated, AbbVie is taking its case directly to Shire's shareholders this week, with CEO Richard Gonzalez crossing the pond to deliver his pitch in London. Gonzalez will argue that (among other things) AbbVie provides the platform to immediately take Shire's rare diseases franchise to the next level.

Shire is not remaining placid. Combative CEO Flemming Ornskov has countered with the prospect of a stand-alone Shire doubling its sales by 2020. Nonetheless, Ornskov claims he is agnostic regarding a takeover and is working for his shareholders, asserting that "you should look at my record. I'm all about shareholder values and returns. I'm in no way intransigent, but that decision is made by the board of directors."

If that is the case -- and I hope it is -- Shire's refusals is simply smart bargaining. I suspect AbbVie is willing to go higher with its offer to cinch this deal. Shire is in play and, without the same political support as AstraZeneca, it would be surprising if it remains independent (even if Shire isn't the ultimate acquirer) -- a better price is in the offing.

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Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

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8/28/2015 4:55 PM
^DJI $16643.01 Down -11.76 -0.07%
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Shire plc (ADR) CAPS Rating: ****