Astrazeneca shares jump 15 as Pfizer bid goes hostile

Shares in pharmaceuticals giant Astrazeneca jumped by 15% on Monday after US sector peer, Pfizer, confirmed market speculation that it had approached the UK firm regarding a merger.

Pfizer confirmed to the market this morning that it had approached AstraZeneca in January regarding an offer that was rebuked. It re-approached the firm last week with AstraZeneca refusing to discuss the potential of a merger, leaving the firm in no man’s land regarding their offer.

The merger – if successful – would create one of the world’s biggest pharmaceutical companies, worth more than £100bn.

Pfizer goes hostile

Make no mistake; the confirmation today of Pfizer’s interest is a declaration of its intention to now pursue a hostile merger.

With AstraZeneca rebuking their attempts to negotiate, Pfizer has tried to create a buzz within AstraZeneca’s leading shareholders to get them to force the issue with the current board. The board of AstraZeneca remains under pressure after falling sales and a failure to gain momentum for the executive’s turn-around plans.

AstraZeneca’s actions have forced Pfizer into a corner. It has no other option that to act now. The leaks that led to the Financial Times running two stories in the space of a week on Pfizer’s motivation to merge undoubtedly came from leaks inside the company to get the story out there and start forcing the issue. The confirmation this morning was as much a memo to AstraZeneca’s leading shareholders as the executive board of the UK firm itself.

Pfizer’s motivation now is to try and create friction internally at AstraZeneca and by doing so, force the company to the negotiating table. Sometimes it works, and at a cost, but most times it doesn’t.

And we should not forget that hostile takeovers are not merely to force the issue in the now and present. They form part of a longer-term strategy to create a edge of instability within the company so that it becomes wounded and more vulnerable further down the line at the first sign of shareholder angst if they fail to perform.

Astrazeneca’s leading shareholders include; Blackrock (7.81%), Invesco (5.77%), AXA (4.52%) and Legal and General (3.01%).

Pfizer’s tax dilemma

Something that’s not being hugely reported is the fact that, from a tax perspective, this deal makes huge sense to Pfizer. They’re sitting on a burgeoning cash pile of multiple billions outside of the US, and would face a hefty tax bill to repatriate this cash. So they have to find a way to spend it that suits the company’s goals and a merger is one way to do it.

The offer

The offer made from Pfizer back in January is estimated to be for £46.61 a share. At the time, that represented roughly a 28%-30% premium on the share price.

Today’s news see’s Astrazeneca shares jump more than 15% to trade above that original offer price and so whilst Pfizer had to leak the news, they are playing with fire. They’ll need to revise their original offer to maintain its attractiveness to the firms’ major shareholders.

Yet such a premium on a company whose main attraction is its potential drugs pipeline (which is subject to regulatory approval) such as its experimental cancer drug, as opposed to its existing pipeline and recent loss of patents, may be hard to fathom for Pfizer’s shareholders.

And let’s not forget, this would also be yet another large coup of a UK firm to foreign hands, which means the merger would be diced with political volatility less than a year before a hotly contested general election.

My hunch here is that this hostile bid is likely to end in failure but could see a revisit in the next 12 to 18 months for Pfizer.

However, the one thing to remember with hostile takeovers is that they typically know no bounds, play by less rules and shows the desperation of a firm to make the deal happen, normally at a large cost to both the firm’s financials and reputation.