Pfizer-Allergan Merger Could Be Big Win for Stockholders
Pfizer Inc. (NYSE:PFE) shareholders are about to get a Botox injection as the U.S. pharma company is starting talks with Allergan Plc. (NYSE:AGN), one of the world’s top producers of cosmetic Botox. Holders of PFE stock know that a Pfizer-Allergan merger would give birth to a pharmaceutical colossus with a market capitalization of $300 billion.
Pfizer stock is trading at just over $35.00 and it’s in five-year-high territory. Were the merger with Allergan to be approved, there is no telling where the stock could be heading, considering the fiscal advantages and strategic business case for the union. However, there are those who would oppose the union and the proposed merger as critics will charge Pfizer with becoming yet another American company fleeing abroad to pay less tax.
The Wall Street Journal suggests that Pfizer and Allergan together would be larger than Johnson & Johnson (NYSE:JNJ), allowing the resulting company to accelerate growth while cutting their corporate taxes because Allergan is based in Dublin, where taxes are lower than in the U.S. The difference in tax rate, rather than Botox, may be the catalyst for the merger. In Ireland, the corporate tax rate is 4.8%, while in the United States it is 25.5%. (Source: Vincent Boland and James Politi, “Tax avoidance: The Irish inversion,” The Financial Times, April 29, 2014.)
Here’s What Pfizer Stockholders Need to Know
There is growing concern about the “reverse tax” practice, which has already caused U.S. biotech AbbVie Inc. (NYSE:ABBV) to cancel plans to take over Irish Shire. Therefore, investors in Pfizer stock, or Allergan stock for that matter, should contain their euphoria.
Nevertheless, Pfizer can make a solid business case to regulatory authorities that could see the deal going through. By buying Allergan, Pfizer would be able to recover revenue after a longstanding erosion of its sales.
Tim Anderson, an analyst at Bernstein Securities, considers Allergan to be an appropriate target for Pfizer, especially since the recent market correction has made it attractive in terms of valuation. The research firm expects Pfizer stock to move swiftly to $41.00 per share. (Source: “Pfizer Inc (NYSE:PFE) Had Its TP Raises by Researchers at Bernstein to $41.00,” OCTA Finance, Oct. 28, 2015.)
In terms of products, the transaction would allow Pfizer to strengthen its therapeutic dermatology and generic lines. Allergan merged with Actavis in March as part of a transaction for $66.0 billion. It then sold its generics in July to the Israeli Teva Pharmaceutical Industries for $40.5 billion.
The main pharma sector players are attempting to refocus it on a limited number of activities they dominate while the generic wish to approach the critical size and get their hands on products with higher margins.
Indeed, Pfizer’s boss Ian Reid claims Pfizer was never coy about its intentions to focus on acquisition targets that would allow it to cut its tax burden. The merger with Allergan should also be analyzed in the context of the 2015 wave of mergers and acquisitions in the pharmaceutical sector as many patents in the industry expired. Allergan itself sold its generic drugs division to Teva. Pfizer has been on a dating spree for the past year, but it never managed to find the right partner.
Pfizer developed a healthy attraction to AstraZeneca last year, although unsuccessfully. Pfizer’s tastes have been consistent; distinct for lower corporate taxes. The appealing quality, then as now with Allergan, is the fact that AstraZeneca would have given Pfizer the opportunity to move headquarters overseas and pay less tax. Unfortunately, Pfizer’s attraction proved unrequited, as AstraZeneca was not interested.
Here’s the Bottom Line on Pfizer Stock
Pfizer stock was about to explode after it courted Actavis, but the intense series of chats did not even lead to a date, let alone a merger agreement. Therefore, Pfizer’s agreement with Allergan is the result of a long process and PFE stock should see a sharp rise toward its all-time highs of $48.00 per share when it concludes.
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