U.S. stocks are higher in early afternoon trading on Wednesday, with the S&P 500 (SNPINDEX:^GSPC) and the Dow Jones Industrial Average (DJINDICES:^DJI) (DJINDICES: $INDU) up 0.63% and 0.42%, respectively, at 12 p.m. ET. One of the highest-profile movers within both indexes: Pfizer. This morning, the pharmaceutical giant officially announced that, in concert with Allergan plc, it is terminating their deal to combine, following the Treasury Department's Monday release of "additional actions to further rein in inversions." Pfizer's announcement was heavily anticipated; the shares of both it and Allergan are outperforming, up 3.57% and 3.64%, respectively.
In a record year for global mergers and acquisitions, Pfizer's proposed combination with Allergan was, at $160 billion, by a substantial margin, the largest announced transaction in 2015 (in nominal dollars, it would have ranked as the third-largest deal of all time, behind American Online-Time Warner and Vodafone Airtouch-Mannesman).
The stock market's reaction suggests that Pfizer's investors are not unhappy to see the deal collapse. As Financial Times columnist Michael Skapinker wrote this morning, "[a]nyone who cares about decent management, long-term corporate commitment and the reputation of business will take grim satisfaction from the collapse of Pfizer's proposed merger with Allergan."
I agree with that statement, but perhaps you think I'm simply piling on after the fact. If so, I offer up in my defense three articles I wrote at the end of last year, in which I outlined the reasons for my skepticism regarding this deal:
- Nov. 23: 3 Reasons to be skeptical of the Pfizer-Allergan megamerger
- Nov. 25: Even Pfizer and Allergan have their doubts about their $160 billion merger
- Dec. 3: The Pfizer-Allergan merger: From serial acquirer to serial offender
My fundamental objection to the deal, a so-called "inversion" that would have allowed Pfizer to adopt Allergan's tax domicile, was mainly driven by tax considerations rather than business fundamentals.
Don't get me wrong: In principle, I am not opposed to taking taxes into consideration in assessing the merits of any transaction (it would be an abdication of one's fiduciary duty not to), but a favorable tax outcome ought simply to support the business case for the deal rather than being the business case in its entirety.
By this Fool's reckoning, Pfizer CEO Ian Read did not make a convincing case for the merits of the deal. Furthermore, he badly misjudged the determination of the Obama administration to curb tax inversions. He ought to have known that, given the size of the deal he was proposing, it constituted a high-profile target for the administration, one that would set an example.
Finally, this is the second time in two years Read has misread the political mood as it pertains to Pfizer. In May 2014, Pfizer was forced to give up on its pursuit of AstraZeneca plc because of political pressure in the U.K. (that deal was also predicated on a tax inversion).
By my count, that's two huge deals that have collapsed on Read's watch. The next case he needs to make to investors, more convincingly, for his own sake, is why he should get to keep his job.
Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.