The Dow Jones Industrial Average (^DJI 0.66%) dropped back into the red in early afternoon trading Monday, down five points as of 1 p.m. EDT.
Dominating the headlines Monday morning was news of two megadeals, one on the ropes and one just getting started.
Big Pharma, big dollars, and an even bigger rejection
British Big Pharma AstraZeneca on Monday rejected U.S. rival Pfizer's (PFE -0.35%) latest takeover offer. The news sent AstraZeneca's stock tumbling 12%, while Pfizer rose nearly 1%.
Pfizer was seeking access to AstraZeneca's pipeline of cutting edge-cancer drugs, among other benefits of a merger. After weeks of gyrations and negotiations, Pfizer claimed the current bid was its final offer.
The offer of $92.50 per share was a 15% increase from Pfizer's original offer. The sweetened offer also increased the percentage of cash in the deal from 33% to 45% after AstraZeneca executives claimed the prior offer was too stock heavy.
With this rejection, U.K. law prohibits Pfizer from making another offer for six months, unless AstraZeneca decides to negotiate. In that case, the two companies could return to the table and work out a new proposal. In a statement released this morning, Pfizer said it does not plan to move forward in a hostile manner.
It appears that the deal may be permanently on ice.
Reshaping the telecom landscape
Dow component AT&T (T 0.50%) intends to buy satellite TV provider DIRECTV (DTV.DL) for $48.5 billion. The telecom giant was down 2% on the news, while the pay-TV company fell 1.4%.
The deal would give AT&T access to DIRECTV's 38 million subscribers in the U.S. and Latin America. Analysts applauded the move, citing the strategic advantage of immediately offering a nationwide TV service to complement the company's existing wireless network.
The deal now hinges on regulatory approval, a hurdle that investors should not overlook. In 2011, AT&T learned this lesson the hard way.
At the time, AT&T was attempting to buy rival T-Mobile for $39 billion. The deal fell through amid heavy regulatory scrutiny, leaving AT&T to pay a very rich $3 billion breakup fee to T-Mobile's then-owner Deutsche Telekom.
This time around, AT&T negotiators ensured there would be no breakup fee, but the risk on regulatory approval still remains. Company executives have already started spinning public opinion on the matter, emphasizing the potential to challenge dominate cable providers with better pricing and service for consumers.
AT&T and DIRECTV already offer co-branded offerings in a handful U.S. markets. Consumers and investors should expect to see this model expand. The two companies believe this bundling of services is the key to both regulatory approval and long-term success as a combined entity.
Only time will tell what comes of both the AstraZeneca rejection and the DIRECTV approval. Mergers are always a risky prospect, and especially so when the existing companies are worth tens or even hundreds of billions of dollars.
That said, when industries are in upheaval and facing dramatic changes, opportunities can often be found. For smart value investors, it's all about understanding the specific company's ability to ride the big picture trends and win in the long term.
