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The Best Laid Plans

Stephen White

Until yesterday I thought that the bid by US pharma giant Pfizer for UK based pharma giant AstraZeneca was a flash-in-the-pan piece of opportunism. We first heard of the plan at the beginning of May, when an offer of £50 per share was tabled. The merger would create the largest pharmaceutical company in the world. It was based on two premises, firstly that AstraZeneca were weak because their product portfolio contained a number of high-profit drugs which were coming to the end of their patent protection, and with nothing much in the R&D cupboard to replace them, and secondly because it gave Pfizer an advantage by enabling them to move their head office to the UK and save loads of tax in an avoidance wheeze.

My take, from all the news reports, was that once Pfizer had seized the initiative they were determined to see the takeover through. AstraZeneca were hostile to the idea, the British Government had become hostile because of a lack of trust in assurances on job security which had been given by the Pfizer big bosses, and the US government were making noises of protest about tax avoidance. But Pfizer continued to pursue its prey, making a revised offer of £53.50 per share and then a ‘final’ offer of £55, valuing AstraZeneca at over $100 billion. The offer was rejected by the AstraZeneca board after only 2 hours. And that was the end of that.

Then I read a Reuters report by Ben Hirschler which gave me a completely different perspective. You can read the report here. Pfizer had not only been planning this takeover for months, but they had initiated talks with the AstraZeneca senior management team in November – 7 months ago. This was no flash-in-the-pan. It was carefully strategized. And once they knew they were in play AstraZeneca had months to prepare their negotiating defence, which started in January with unexpectedly upbeat forecasts about the resurgence of their sales, which succeeded in raising the share price, making the company a more expensive fish to catch.

From a negotiator's perspective it is interesting to speculate why the Pfizer strategy, no doubt developed by analysts with brains as big as footballs, has been a resounding failure. Of course they knew that the Astra board would be resistant, but they also knew that the real decision makers in these deals are the institutional investors who own the shares. If the price is right, they will force the board to do the deal. Astra were able to move the share price upwards with their forecasts on future sales and bullish comments at medical conferences about future drug development, and that made the shareholders believe they could get more. One pundit’s current view is that Pfizer will have to go to £58.50 per share to stand a chance of success.

So I think they got the price wrong – not the opening proposal, which if it had been successful would have indicated that they had pitched way too high, but the ‘final’ offer, which was demonstrably too low.

The strategists also got their timing wrong. Pfizer should have moved earlier, at the end of last year. That would have given Astra less time to work out a defence, and less time to mount the PR exercise which has bolstered the share price.

But maybe Pfizer are simply playing a long game. Although they have made their ‘final’ offer, stock exchange rules allow them to re-engage with AstraZeneca in November, or even earlier in August if an invitation to talk comes unilaterally from Astra. Low pricing in the first skirmish might persuade investors that they won’t get much more if there is a second go.

Watch this space. And keep on taking the tablets!

Stephen White

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