The Pfizer-Wyeth Merger - We Were Wrong – They are WRONGER

OK, I was wrong, but there is no mea culpa needed. The Pfizer (NYSE: PFE) and Wyeth (NYSE: WFE) deal has been announced and somehow financing was arranged. The hubbub in the media seems to support my opinion that this a bad deal for Pfizer’s shareholders, especially if you’re one of the 19,000+ employees who will likely lose their job in this deal. (Wanna bet that after President Obama gets through bashing banks for paying out $18 billion in TARP funds for bonuses, he’ll be setting his sights on Big Pharma.) Although, Jeff Kindler may still be trying to put a positive spin on things. Jeff better be good at spin meistering with a 50% reduction in Pfizer’s dividend-anyone notice that after an initial run up, both PFE and WYE retreated rather significantly based on some on Wall Street who don't view this merger as a layup after all.

Mike Huckman’s been busy doing the post-game review on this deal. Check out his blog (http://www.cnbc.com/id/15837675 ), in particular, his January 27th and 28th blogs. He offers some interesting perspectives and also links to a Wall Street Journal analysis of the deal. Other than the companies themselves and their hired flacks, I haven’t come across any serious commentators who think that this is a good deal.

I’m going to keep sticking my neck out on this one though. The virulent press reaction and Kindler’s ability to keep the financing together for this deal are my two main reasons.

First, the press reaction. Pfizer is simply buying revenue (at a very high price we add) to offset its looming loss of Lipitor to the generics. Kindler’s been trying to keep his job and has been shuffling assets around in a corporate finance version of three card monte. More people are going to be looking at this deal and start questioning it. I don’t expect anyone to be riding to the rescue with a counteroffer. Anybody remember Boston Scientific (NYSE: BSX) and Guidant? Let’s see, how many billions in overvalued assets did Boston write off the other day? Many pundits (and we agree) think that Pfizer would have been far better off buying several biotechnology companies (e.g., Biogen-Idec, Gilead, Genzyme or as we have advocated Amgen all would have helped) and why justify re-entering the Consumer business when two years ago, Kindler and company claimed they were selling the Pfizer Consumer business to J&J (NYSE: JNJ) so they could "focus' on Pharmaceuticals.

Next, let’s talk about that bank financing. I haven’t come across any details about which financial institutions or investors are behind the $22.5 billion in external financing or its terms. In these times of credit crisis, I’m sure that they are very interesting. By the way, another $47.5 billion will come from internal financing. One commentator noted that Pfizer would probably have to repatriate offshore cash to help with the deal. I suspect that this could mean paying US corporate taxes. Again, not a great deal for shareholders. Given the lack of value that deal produces along with the job losses noted above, I wonder if banks might start rethinking their loan arrangements. Sooner or later, Washington, DC is going to start asking what’s happening with all the money being forked over to the financial services sector. Executive bonuses and job losses don’t seem like a good return for taxpayers’ money. Somebody’s going to start paying attention here.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Pfizer and Wyeth – What’s in for Pfizer’s Shareholders?

This week stories began circulating about a potential merger between Pfizer (NYSE : PFE) and Wyeth (NYSE: WFE). Larry’s already written about what it could mean for the pharmaceutical industry if it happens. I’d like to focus on what it means to Pfizer’s shareholders. Personally, I think that it’s nothing more than a defensive ploy on the part of Pfizer. I refer my readers to my January 5th blog of this year for my thinking on large life sciences mergers and acquisitions given the current financial climate.

In this week’s Barron’s, correspondent Jacqueline Doherty writes in the Follow-Up section about the proposed deal and she offers an interesting analysis. I find one point particularly interesting. Acquiring Wyeth would give Pfizer the over-the-counter products Advil and Robitussin. Didn’t Pfizer recently sell off some very valuable consumer products to Johnson & Johnson (NYSE: JNJ)? Sounds like management is a bit confused if you ask me.

Acquiring Wyeth will probably dilute Pfizer’s earnings for some time. How long? I don’t know and I haven’t seen anything published yet. But, it’s a reasonable expectation. Doherty suggests that a combined firm would still have Pfizer’s earnings down by 11% from the prior year. I suspect that we have yet another management buying earnings. Why it should work here when it hasn’t anyplace else, I don’t understand.

Pfizer’s dividend yield is respectable (Barron’s states 7.2%), but, two things about this. First, above normal dividend yields, especially in times like these, normally indicate some sort of market risk. Next, how much longer will this dividend continue? Even General Electric (NYSE: GE) has had to cut its dividend! Depending on how Pfizer finances this deal, the dividend might be at risk. Normally once safe healthcare brands are not as recession-proof as they once were. Johnson & Johnson is learning this to its own chagrin. Of course, there’s the possibility of good things to come from Wyeth’s pipeline. Just how realistic is that though?

Pfizer’s CEO, Jeffrey Kindler, appears to be struggling with what to do. I don’t want to criticize him. He’s in a tough spot like every Big Pharma CEO today. A big acquisition would build momentum and excitement in the press and buy time in the hopes that something, anything, happens outside in the real world. Kind of like what the Federal government and Big Auto are doing, huh?

I’m still not convinced that deals like Pfizer and Wyeth are nothing more than hype being churned by people anxious for a story, any story, to add some pizzazz to what is an otherwise bleak market situation. From a shareholder perspective, this isn’t a god long term play. No, I really don’t think that we’ll see these deals happen. (And, even if announced, completing the financing is another story for another blog.)

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Contrarianism Lives!

There seems to have been a lot of writing recently about the lack of merger activity and what may be possible. Amgen seems to be getting a bit of ink too, but, then that one always seems to. First, Julie MacIntosh of the Financial Times published an interesting piece (http://www.ft.com/cms/s/0/57ccbec6-db91-11dd-be53-000077b07658.html ) concerning this subject on their website this January 6th. Her take was that the mergers and acquisitions market would be slow in coming back as companies assess risks and investment advisors want to appear cautious in recommending deals. Earlier in the week, Andrew Jack, also of the Financial Times speculated (http://www.ft.com/cms/s/0/20d8f19e-da8a-11dd-8c28-000077b07658.html ) about Pfizer entering into a large acquisition of a rival and what it might lead to in a pharmaceutical industry shying away from the large deals that spawned many of today’s Big Pharma companies. His musings were based on comments by Jeff Kindler, Pfizer’s CEO. He noted debates in the investment community about Pfizer acquiring Amgen. (CNBC had also reported this story.) As I wrote earlier, that’s an old story heard many times before.
What I find interesting here is how from very substance, a lot of speculation is going on. As I blogged earlier, I don’t think there is much of a market for large deals in the pharmaceutical industry right now. I find myself more in agreement with Julie MacIntosh about deal prospects in the industry. That is, the length and breadth of this recession will determine people’s willingness to return to the deal markets. Like I wrote earlier, she quotes Mark Shafir, the global mergers and acquisitions head at Citibank, who believes that bankrupt or near bankrupt companies will provide the first wave of opportunities. He goes further saying that cash rich companies may then begin to prowl for values. But, all this will take time. While these activities may start this year, I don’t think that they will culminate in any significant deal activity until 2010 at the earliest.
I know that some people have been writing about 2009 being the big year for drug company acquisitions. I’m just not buying into it. Let’s see what comes of these vaunted pipelines. Let’s see what happens when a President Obama instructs Medicare to negotiate drug prices with the drug companies. (I’ve always found it interesting that when corporations squeeze their vendors for lower costs, it’s capitalism; when the government does it, it’s Marxism.) As this blog has repeatedly said over the last year, there is too much capacity in the drug industry. Whatever deals happen this year will be restructurings designed to handle this fundamental problem.
As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.


Contributed by Guy de Lastin