I didn't like the idea on Friday. I don't like the deal today. The final version of the deal announced this morning for Pfizer (NYSE:PFE) to buy Wyeth (NYSE:WYE) doesn't look any better after a stimulating weekend of watching the rumor mill unfold.
In short, Pfizer's paying $33 in cash and 0.985 shares for each share of Wyeth, for a grand total of $68 billion. There's hardly anything to like about it. About the only thing to like is that the companies announced fourth-quarter earnings early -- Fools live for earnings season.
Pfizer's taking on debt to pay for the acquisition, but it's also using some of its beaten-down stock to pay for the acquisition, which just seems crazy. If management had proposed a secondary offering at this level instead, it would have been laughed out of the boardroom. But it's OK as part of a large acquisition?
Sure, in order to swing it, the company had to use some equity, but my point is that it didn't have to get such a large deal done. I mean, Pfizer hasn't exactly gotten long-term value out of its previous ginormous acquisitions. Take a look:
|
Acquired Company |
Price |
Date Announced |
Proposed Cost Savings |
1-Year Return |
5-Year Return |
|---|---|---|---|---|---|
|
Warner-Lambert |
$90 billion |
Feb. 7, 2000 |
$1.6 billion |
29.4% |
(27.1%) |
|
Pharmacia |
$60 billion |
Jul. 15, 2002 |
$2.5 billion |
6.6% |
(7.8%) |
|
Wyeth |
$68 billion |
Jan. 26, 2009 |
$4 billion |
?? |
?? |
Sources: Yahoo! Finance and company press releases.
Returns from closing price immediately prior to announcement date, including dividends.
Buying Wyeth solves some short-term problems for Pfizer, but getting bigger isn't necessarily better. Heck, acquiring Warner-Lampert and the other half of Lipitor was kind of what got the company into this bind in the first place.
Not everything scales
True, there are advantages to combining Pfizer and Wyeth. One sales rep selling two drugs is more efficient than two sales reps, and there will be plenty of back-office staff and management that can get cut. But the driving force of drug companies -- research and development -- doesn't scale that well.
It seems like it should. A huge company with tons of resources should be the best in class, shouldn't it? But it hasn't worked out that way. The best drug discoveries seem to come from small drug companies. Maybe it's because they have to perform well. It's easy to become complacent at a large drugmaker, but scientists working at smaller drug companies need to make major discoveries or their jobs are at risk.
Here's another way to look at it: What could Pfizer have gotten instead by spending $68 billion? Looking at just the market caps, Pfizer could have grabbed Biogen Idec (NASDAQ:BIIB), Vertex Pharmaceuticals (NASDAQ:VRTX), Elan (NYSE:ELN), and a full dozen other $1 billion development-stage drugmakers and still had half of that $68 billion left over. Sure, that wouldn't give Pfizer as much of an immediate boost to revenue, but the pipeline would be well-stocked, ready to boost the top line post-Lipitor.
But that's not the worst of it
The main reason I picked Pfizer as the best stock for 2009 just got cut in half -- its dividend, that is. The company announced that it's halving the dividend in the second quarter to just $0.16 per share.
That dividend was what was propping up Pfizer. Investors were getting paid to wait, and as long as the dividend didn't get cut, there seemed to be a lot of downside protection. This made owning Pfizer and all its coming problems a lot more palatable.
Now, don't get me wrong: An annual dividend around 4% (and growing as the stock price is falling as I write this) still isn't bad. But it doesn't offer nearly the protection that Friday's closing 7.3% yield did. Just ask the people who bought Pfizer near $28 per share in 2007.
And what happens if the dividend gets cut again? Bank of America (NYSE:BAC) cut its dividend twice in short order, and General Motors (NYSE:GM) suspended its dividend earlier last year; the pharmaceutical industry could be the next victim.
Where to go from here
I don't know about you, but I'm hanging up my bull horns and heading back into my bear cave for a little siesta. Pfizer just increased the number of drugs it has coming off patent in the near term and stopped paying investors as much to wait it out. Wake me in 2012, or after the dividend yield becomes more attractive.
Head over to Motley Fool CAPS and tell us what you think.
