Commercial awareness: think like a professional about... Pfizer and AstraZeneca

Our banker, lawyer, consultant and accountant consider pharmaceutical giant Pfizer's attempt to take over rival AstraZeneca

American pharmaceutical giant Pfizer has made a takeover approach to UK/Swedish rival AstraZeneca. The US-headquartered corporate, most famous for inventing Viagra, first made an offer to UK-listed AstraZeneca in January, but this offer was rejected as it was deemed to "significantly undervalue the company". Pfizer has now made a higher offer, which values the company at £63 billion, but this offer has also been rejected.

Were the deal to go ahead, it would be one of the biggest mergers in UK corporate history and the biggest foreign takeover ever - overtaking, for example, the Cadbury/Kraft merger in 2010 and the private equity buyout of Alliance Boots in 2007.

The deal could bring some benefits to the UK economy. Pfizer has stated an intention to become headquartered for tax purposes in the UK, which would boost government revenues.

However, Pfizer has a track record of cutting staff and research facilities in the wake of mergers and acquisitions, so this deal could have a negative impact on British pharmaceutical expertise.

There are also fears that the merger could significantly hit UK export activity, seen by the government as an important part of its economic recovery strategy, as AstraZeneca is a very active exporter, accounting for around 2.3 per cent of the nation's total exports.

This potential transaction is just one of many that have taken place or been proposed in the pharmaceuticals sector recently, as falling product revenues and reduced government spending on healthcare have made dealmaking attractive.

Pfizer and AstraZeneca's close rivals Novartis and GlaxoSmithKline recently agreed to a complex deal involving Novartis acquiring Glaxo's oncology business while selling Glaxo its vaccine division, and the two corporates are also setting up a new consumer healthcare joint venture together.

Thinking like a...


Classy classic

This is in many ways a classic merger deal. Two companies with clear synergies in terms of their products come together in the hope of making more money through cutting down on costs and gaining tax advantages. Because the financial advantages for Pfizer are so apparent, I'm not surprised that AstraZeneca is holding out for the highest possible offer.


Enterprise surprise?

Many commentators are uneasy about the impact this deal could have on Britain's life sciences sector and the economy as a whole. Does the government have the legal power to intervene? Under the public interest test for mergers in the Enterprise Act, the deal could be stopped if it were deemed to be a threat to national security, media plurality or financial stability, none of which seem likely. But there's also scope to introduce new grounds - for example, in the case of the 2008 proposed Lloyds/HBOS merger, "stability of the UK financial system" was added.


Tax appeal

This deal is all about tax. Pfizer's stated intention, should the merger go through, is to become domiciled in the UK. That would mean paying corporation tax at UK rates, not US ones - a reduction from the American 38 per cent to the British 21 per cent, due to fall to 20 per cent next year. In addition, Pfizer's overseas earnings would also no longer be taxable under the American system if passed on to US shareholders. The prospect of losing such a significant chunk of tax revenue because of high US tax rates has led to calls from American politicians for tax reform.



This deal needs to be seen in the context of one of the biggest issues facing the pharmaceuticals industry at the moment: the patent cliff. Both Pfizer and AstraZeneca, along with their rivals, are facing the imminent expiry of patents they own on some very lucrative drugs they've developed. Once these patents expire, other pharmaceutical companies are free to manufacture and sell copycat versions. When faced with the loss of significant streams of revenue, maintaining profits through the costs savings that mergers and acquisitions often bring can look very attractive.