Okay — it’s a slow Merck news morning so. . . this one was inspired by the musings of a very cogent commenter, right here on the site, asking after whether I thought Pfizer — given the splash Novartis made yesterday — would actually become a net “buyer” (i.e., get bulkier) in the near future.
I really doubt it. Pfizer is still officially considering a three way split — or getting skinnier, on all fronts. The newly emergent trend (see WSJ pull quote below) in pharma is toward leaner, faster and sharply-focused offerings (being No. 1 or No. 2 in a few select high margin markets). So, the rumor would be — at best — strongly counter the trend, and Pfizer’s own announced strategic review.
Now. . . let us consider why Mr. Read might have (however fleetingly) entertained the rumored deal — about six months back. This is all pure speculation — but recall that Ian C. Read grew up as an operations accountant, in internal audit, at Pfizer — ever since 1978. Operations. Operations. That is to say his seminal experience base, at the big blue “P” pill, was to see — first hand — how Pfizer creatively used US GAAP rules to maximize overall enterprise profiability — and, in the lowest tax jurisdictions, to boot.
So — I am willing to bet that Mr. Read was initially attracted to the idea of buying AstraZeneca in order to cut Pfizer’s overall global consolidated tax rates, by re-domiciling the resulting behemoth in the UK — such a transaction is called an inversion. [He also would have loved to be able to efficiently redeploy the $70 billion or so, in parked foreign earnings Pfizer holds, without paying US "deemed dividend" taxes on it.] So — the idea was likely floated by a banker (pitched over dinner in mid-town Manhattan(?) — to Mr. Read) to buy AstraZeneca, invert Pfizer’s domicile in the UK, and then. . . begin lopping off huge chunks of the resulting leviathan, and dumping them over the side. In the end though, once some capable antitrust lawyers raised their hands — to point out that it would be rather a lot of dumping, and a lot of that comprising the core assets of both, all as required by the relevant authorities. . . well, the discussions likely quickly cooled off. I bet. Of course, all of this could be dead-wrong — but I bet it is pretty close to the truth. At least in the broad outlines. So, don’t bet on the rumor coming true — not without some very significant accompanying divestitures, pre-close.
Here is this morning’s Wall Street Journal ($$$ Subs. Req.) — confirming much the same as I mention in the second paragraph above:
. . . .A new flurry of drug deals shows how the global pharmaceutical industry is reversing course, as companies narrow their focus after decades of diversifying their drug portfolios.
Swiss drug giant Novartis AG and the U.K.’s GlaxoSmithKline PLC on Tuesday were the latest to illustrate that about-face, announcing more than $20 billion in deals. Novartis will sell its animal-drugs business to Eli Lilly. . . .
So while anything is possible, I think a $100 billion acquisition by Pfizer is. . . remote. Said another way, the germ of the idea to do it, was likely more “financial engineering” than actual, organic operational “value creation“. [Mr. Reed is smarter than that, now.] But if Ian Read were to make a buy of that size, he’d immediately (pre-close, even) shed large chunks of the constituent companies — pruning the bush, as it were. And the EU and US antitrust authorities would likely require him to cut off major branches — ones that he’d rather. . . not. Just my $0.02 — that deal never gets announced, let alone closed. So, be very careful out there, oh you “merger arbitrage” bettors. Smile. . .