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Can anything prevent Pfizer's megamerger with AstraZeneca?

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Pfizer CEO Ian Read

As Pfizer CEO Ian Read mounted a charm offensive in the U.K. this week, wooing alarmed lawmakers and big shareholders in AstraZeneca in hopes of gathering support for its $100 billion takeover bid, the Financial Times got hold of a couple of AstraZeneca's biggest investors and found that they were discreetly wide open to a Pfizer takeover--provided the U.S. pharma giant agreed to make an offer they couldn't refuse.

Given the simple fact that no bidder in any biopharma buyout like this starts with its best price, a sweetened offer is almost certainly built into Pfizer's ($PFE) strategy, provided no one manages to cool Read's sudden--and completely unexpected--ardor for AstraZeneca ($AZN). As long as the main issue centers on price and how much cash versus stock is included in the deal, Read's chances of directing this bid to a successful conclusion are good. Pfizer has tens of billions in offshore accounts to complete this deal. And now Read is committed to making it happen.

According to Bloomberg's sources, Pfizer is already planning to push its bid for AstraZeneca to $106 billion as early as next week, possibly adding more cash to the offer.

There are also two governments involved, though, and that could change the landscape considerably, given that the U.K. government's tax policies and R&D incentives are a major motivation behind Pfizer's interest in landing a domicile in London. The savvy FT team reported that two of the most powerful figures in Whitehall--Sir Jeremy Heywood and John Kingman--have been appointed to negotiate with Pfizer as the country's unions cry havoc and some lawmakers begin to make noises about blocking the takeover.

"We will see how events pan out over the next few days, but clearly given the scale of the proposed merger it is important that we consider the impact not just on shareholders but also on employees and the wider interests of the UK," Ann McKechin, a member of the parliamentary business, innovation and skills committee, told Reuters.

In the European scene, though, the U.K. government is known for its hands-off policy toward corporate deals and reorganizations in the pharma world. The country's unions are toothless. AstraZeneca has experienced no major kickback over its plans to lay off thousands of workers, and the R&D side of the business has seen additional recent cutbacks from Shire ($SHPG) and Novartis ($NVS) go unmolested. Pfizer has had experience in this field as well, first announcing that it planned to close its R&D campus in Sandwich several years ago but eventually deciding to keep about 700 of the 2,000 staffers on the site. That leaves Pfizer with a big stake in the country already and a strong incentive to retain much of AstraZeneca's R&D organization--with the chance to cut into it again at a later date.

So can the U.S. government block the deal?

Any kind of prospective blocking movement from Congress would likely be months or more away. Even if a divided Congress could agree on closing this particular loophole, Pfizer still has ample opportunity to jump through. The biggest impact that the threat of U.S. government action would have is likely to be on everyone else who might decide to follow a big name like Pfizer and emigrate to the U.K. And some tax specialists say others may rush ahead to follow Pfizer's example to get their status grandfathered in.

AstraZeneca, though, isn't necessarily just going to agree to be gobbled up after years of reorganizations, layoffs and new R&D strategies. The management still has plenty to prove, and there's a distinct chance that the company, in the bottom ranks of the global top 10, can execute a deal that can sour Pfizer's interest. A $50 billion deal to buy Shire--one of the most frequently touted takeover targets in the industry, which has drawn the interest of Allergan ($AGN)--might do the trick, according to analysts in The City for Societe Generale, reports The Guardian.

Then AstraZeneca could do yet another restructuring.

Pfizer has until May 26 to "put up or shut up" under the country's M&A rules. There's no indication that it plans to shut up, but it's going to be a long month for all involved.

- here's the report from the Financial Times
- here's the Reuters story
- here's the story from The Guardian
- and here's Bloomberg's story

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