|Pfizer CEO Ian Read|
The Wall Street Journal broke the news last night that Pfizer ($PFE) and Allergan ($AGN) have had some early discussions about merging into a $330 billion behemoth. Neither company is saying much, though Allergan did confirm the talks this morning. But the irresistible conclusion remains that a deal just might make sense. At the very least, Pfizer isn't being subjected to the same kind of furious backlash it faced when the company made an ill-fated--and ill-considered--attempt to acquire AstraZeneca ($AZN) last year.
Why the change of tune? Here's a sampling of what analysts are thinking this morning.
First and foremost: Pfizer CEO Ian Read never lost interest in a megadeal that would get his Big Pharma tax base shifted to a much more pleasant tax climate. Allergan, technically based in Ireland, would fit the bill on both scores.
Tim Anderson, a careful and longtime Pfizer observer, notes this morning that Allergan, Shire ($SHPG), AstraZeneca, and GlaxoSmithKline ($GSK) could all provide the tax inversion that Pfizer is hunting, but only Allergan seems open to a merger like this. And if it's priced around $375 to $400, those numbers would work.
"This is a comparatively low risk transaction," notes Anderson. "Allergan is (mostly) a US company operating mainly in the primary care markets which Pfizer understands well. The two organizations are geographically close, and the post-merger integration would therefore be easier than a transatlantic deal."
It would also help Pfizer make some big, overnight changes to its numbers.
"Pfizer desperately needs a large acquisition and the resulting synergies to reinvigorate its tepid earnings growth rate," Maxim Jacobs, an analyst at Edison Investment Research, told Reuters.
|Allergan CEO Brent Saunders|
Another point that would bode well for a deal: Allergan CEO Brent Saunders has never been enthusiastic about spending the big bucks on early-stage research. Pfizer's history in megadeals is well known. It mashes together huge organizations, lays off thousands and throws off anything that it doesn't want or need. An Allergan deal wouldn't be resisted based on a commitment to their R&D game plan, something that AstraZeneca and the other likely targets could never stomach. Anderson projects R&D and SG&A cuts of 40% at Allergan, given Pfizer's track record. (Allergan spent $885 million on R&D in the first six months of this year.)
So what would stop a deal?
Evercore ISI's Umer Raffat put together some slides this morning highlighting Saunders' thoughts on a possible buyout from earlier in the year. Saunders was vaulted ever upward in the swift series of deals that made Allergan what it is today. And finding the right positions for himself and other top execs after a merger could be a big sticking point.
Any company looking to acquire Allergan would have to be open to a "culture change and change and balance to leadership and talent and management," Saunders noted.
Anderson's thoughts: "It is natural to wonder if Saunders could lead one the Pfizer divisions if the company eventually goes down the path of splitting up. However, will he stick around that long?"
Saunders' initial strategy will focus primarily on price.
"We do not … see Allergan accepting a price below $400 per share," notes Nomura. "While Allergan's valuation has come down significantly (and unfairly in our view) due to the recent sell-off across the sector, we continue to believe this is one of the best companies in the sector with a fundamental fair value of $350. Given the benefits to Pfizer from a merger with Allergan, and accounting for typical premiums paid in our sector (around 25%), we believe that Pfizer would need to pay in excess of $400 per share to satisfy both shareholders and management."
The wild card here may be held by the Obama administration. The wave of tax inversions that hit last year spurred Treasury to come up with some new tax rules that made it harder to pull off a deal like this. Faced with the loss of Pfizer, the administration may be willing to go one more big step forward on that front. And don't forget the current controversy over drug pricing and the election year ahead. Candidates are likely to step in here as well, and Pfizer isn't likely to get much sympathy from either party for a tax dodge like this.
Still, it is interesting to note that most of the discussion today focuses on the mechanics of a deal, rather than a simple rejection of any new attempt at a megamerger. A slew of big tie-ups in 2009 led to one simple consensus: Megamergers destroy innovation and value. But that argument has gone by the wayside, for now. And Pfizer will want to leave it there.