Pfizer - Astrazeneca - The failed Takeover

The failed AstraZeneca takeover affair may be a stark reminder that there are just a few players who actually influence the outcome of a mammoth Takeover bid involving corporate titans.   They are the board directors, the shareholders (fund managers and institutional investors) and the suited and booted brigade in Whitehall, the government.  These players, the stakeholders in the business, more often than not have interests which conflict. The shareholders want shareholder value and a tidy return on their investment; a non-executive board may have their own goals of self-enrichment to the detriment of the shareholders. On the other hand, the government may view the entity as a tax revenue cow. Moreover, if the business contains valuable intellectual property, patents and provides local jobs the government is unlikely to rubber stamp it being taken over by a foreign rival, on the grounds of national interest.

So with all this in mind it probably came as no surprise that when Pfizer, US pharmaceutical giant, upped its failed bid to approximately 93 USD a share for its British rival AstraZeneca, it has created a political hot potato. Pfizer’s latest failed attempted to take over its British rival has valued AstraZeneca at $116 billion USD, which would be 19 times its projected 2015 earnings. Had the bid succeeded it would have created the world’s largest pharmaceutical company. But Pfizer was not prepared to put more money on the table.  AstraZeneca’s board remains adamant that the company is worth more and rejected the bid on the grounds that Pfizer’s latest offer still undervalued the pipeline of drugs that the company owns, particularly in the field of cancer medications. Well, this may be a vote of confidence for AstraZeneca’s potential future earnings, but the immediate effect was to send the share price tumbling 12 percent.  

Predictably, the shareholders are up in arms, lamenting about the profits they could have bagged. Investment management firm Schroders, which has a 2% stake in AstraZeneca and one of the pharmaceutical company's 20 largest investors, said it was disappointed with the failure of both companies to hold constructive talks.  The fund manager for Schroders added that he "would encourage the AstraZeneca management to recommence their engagement with Pfizer and subsequently their shareholders" and he was critical about AstraZeneca’s board’s decision to rapidly reject Pfizer’s latest offer.
Similar frustrations was also echoed by both Axa Investment Managers and Jupiter Investment Management, which represented AstraZeneca’ s other large shareholders. One top share holder complained, saying, “"we do not think the Astra management have done a good job on behalf of our shareholders," according to a recent report in Reuters.

Nevertheless, the British Government thinks otherwise on the AstraZeneca affair. Indeed, already UK ministers have begun exploratory talks with EU officials over amending the terms of the British government’s public interest test, which currently enables ministers to block Takeovers where there are concerns over national security, media impartiality or competition. Indeed, as I write this piece Minsters are currently reviewing whether to extend the test to ongoing investment in research and design as grounds on which the government could choke off a takeover.


But there may be more than meets the eye to Pfizer’s intended takeover of AstraZeneca. In other words, the big story here may be more than just a huge US pharmaceutical striving for global domination through the acquisition of a foreign rival.  After all, Pfizer has a multibillion dollar cache, so why isn’t it using this hot money to grow its business organically, instead of opting for growth through acquisition?  Perhaps tax engineering is playing a role in Pfizer’s foreign acquisition ambitions.  Indeed, the UK’s relatively lower tax rates compared with those across the pond maybe behind the acquisition. So financial engineers, these days, are burning the midnight candle scheming ways of inventing paper wealth by changing a company’s domicile to a lower tax regime. Take for example, Apple, it has a cache of approximately 150 billion USD, of which 130 billion USD is held in tax havens.

Repatriating the cash would result in a tax liability of 35 percent. “To repatriate our foreign cash under current U.S. tax law, we would incur significant cash tax consequences and we don't believe this would be in the best interest of our shareholders,” said Apple’s chief financial officer.
Likewise, if Pfizer's acquisition had been successful and it had moved its head office to the UK, analysts estimate the combined company's tax rate would have fallen to 23% from Pfizer's current 27%, a sizable amount when billions of USDs are involved.

Maybe all this is making Britain’s prized companies vulnerable to takeovers from across the pond. The climate seems ideal for it, the tax disparities between the UK and the US and moreover the availability of cheap money from the Federal Reserve who maybe even aiding and abetting it.   

What next for Pfizer?  Well, they could bypass AstraZeneca's board and go directly to the shareholders, thereby mounting a hostile bid. Alternatively, Pfizer could use its large cache to mount another bid for another pharmaceutical company, but the potential target company is likely to be outside the US for tax reasons.
For AstraZeneca, the pressure is now on for the board to materialize the profits from their drugs in the pipeline and prove to their shareholders that the company is worth more than 19 times project earning in 2015. Shareholders will be impatient to see the benefits of turning down short term profits for long term gains.

The road ahead looks interesting, after all, everyone has their price and even big money can sway a government.  For private investors there are opportunities in this market if they can spot potential targets, buy into them, sit tight, wait for a predator and then just ride the money wave. 

Darren Winters