Corporate inversion means the reincorporation of a company overseas with the aim of reducing the tax. Pfizer and Allergan are well-known giant pharmaceutical companies that recently agreed to merge in order to form one company. According to the statistics, this merger between the two giants is going to form the biggest pharmaceutical company in the world. The reason for this is the amount of sales of products that both companies have been able to achieve over the period of their existence.
This deal, however, has been coupled with a lot of controversies, since the majority of people believe that it will only bring more disadvantages than advantages. The deal has also been highly speculated in terms of its connection with the tax (Khera, Mahawar, Cartwright, & Datta, 2016). This paper is an analysis of the merger agreement between Pfizer and Allergan. It tries to explain whether the explanations given by analysts that Pfizer wants to merge with Allergan for tax reasons are true or false.
Analysis of the Merger between Pfizer and Allergan
The business deal between the two companies has placed their combined value at an estimated 160 billion dollars. This approximation also covers the debts of the two companies. The deal is also seen as a technique to lower the tax on Pfizer by moving its headquarters from the U.S. to Ireland. Both companies estimate that the current rate of Pfizer's tax will be reduced by 7% from its current rate, which is 25% (Khera, Mahawar, Cartwright, & Datta, 2016). This deal is among the largest sales , mainly because it is an inversion type of a deal. Inversion deals imply a situation when a U.S. based company merges with a foreign company and moves its headquarters to avoid the tax rate for businesses in the American territory.
The company that wants to absorb Pfizer is a huge pharmaceutical company, known as Allergan, which has its headquarters in Dublin. According to the analysis of the deal that is about to happen, there are speculations that the tax rate phenomenon is the main reason behind the merger. However, there will not be a substantial change in cash from one to another in terms of the respective deal. From the valuation of the deal, it is clear that the Pfizer's shareholders will receive a share in the newly merged company for every share that they have held in Pfizer.
For the Allergan's shareholders, they will get 11.3 shares for each of the Allergan's shares they have held. Due to these statistics, the Pfizer's shareholders will receive a 56 % stake in the newly merged company, while the Allergan's shareholders will get a 44 % stake in the combined company (Avi-Yonah, 2015). Moreover, the shareholders may ask for the cash instead of shares in the new corporation; this, however, must not exceed a total of twelve million dollars.
In the reports that have been issued based on this deal, it is clear that this merged company will in essence be an American company. This is because the corporate headquarters will remain in New York City, and it will still be listed on the American Stock Exchange market. The former Pfizer's CEO will be the CEO of the newly merged company, while Allergan's CEO will take over as the Chief Operating Officer. The new business portfolio will cover areas, like Viagra, Botox, and Pneumonia vaccine, along with treatments for other diseases (Mullard, 2016).
The merger can ensure that the new company accomplishes new sales of up to sixty-five billion dollars. The analysts, however, fear that the merger may cause smaller margin businesses to start circulating drugs that have lost the patent protection, hence leading to a loss.
The expected income that the two companies have announced is 2 billion dollars within three years. Even though the merger will lead to a dilution of the Pfizer's earnings in the first year, they are expected to boost by a significant percentage by the year 2019. Many people have different opinions on this business merger. Some people think that it is a substantially outstanding idea aimed at value enhancing.
They argue that the merger is set to ensure the use of greater resources to provide quality products to the market. The join with Pfizer is a step aimed at enhancing the high-growth therapeutic areas. It will also ensure the efficient cooperation in terms of the research and development (R&D), taking into consideration Pfizer's significant innovations and ideas. This, in turn, will contribute towards creating of a new, greater and better biopharmaceutical leader (Pilkington, 2015).
However, one of the disadvantages of this business merger is the fact that it takes place at a time, when the United States government wants to ensure that it tightens the knot on the rules governing inversions. These rules are set with the purpose of discouraging such inversions from taking place. The rules that were released make it harder for companies to buy foreign firms or for the U.S. based companies to transfer their operations to other foreign countries. This is made in order to ensure that the preparations for inversions are limited and stopped. In a stunning turn of events, even after the U.S. have tightened its rules, Pfizer's CEO said that the inversion was still going to happen.
Ian, the CEO of Pfizer, said that the company had gone through all the regulations, and they were still going to move forward in terms of the respective inversion. The CEO of Pfizer emphasized that the inversion was not a way of reducing the tax (Christensen, 2015). This allegation, however, seems false, since with the inversion, Pfizer stands to grow more, especially with Allergan's Botox product, which will generate over two billion dollars a year.
In the modern world, global firms face hardships in choosing the appropriate marketing strategy. Various companies display the certain marketing strategies that are focused on getting the standardization. Being one of the global companies, Pfizer has adopted these strategies to achieve the desired outcomes. The company has decided to standardize its products in most countries, hence eventually focusing on one product (Khera, Mahawar, Cartwright, & Datta, 2016).
The Pfizer's strategy is aimed at localizing communications, which predominantly functions based on the notion "think global, act local." By using its global experiences, the company has customized its products and services to become more appealing in the local market. Thus, the employees will use their influence and experience to adjust the products of Allergan so that they can be more market friendly in the local markets, which have not been taken over by this company until this time.
This merger will reduce the time of establishing new revenue streams, since Allergan has its own R&D department. However, the overall realignment will contribute towards the emergence of a company with another R&D due to the major merger. Pipelines will also have to be reprioritized. The new combined Pfizer will inherit a pipeline of up to seventy experimental drugs from Allergan, including biosimilar drugs, which are highly popular in the biotech market. However, the problem comes in, since their profit margin is essentially smaller than the generic drugs profit.
According to this information, it seems that Pfizer will have no need to struggle to cope with drugs that will take over markets, which they had not taken over yet. Therefore, there is a necessity to simply assimilate the drug pipeline by Allergan. This, in turn, will reduce the time to establish new revenue streams (Rosenmayr-Templeton, 2014).
Over the past five years, the Pfizer's revenue has declined by six percent. On the other hand, the Allergan's revenue has been increasing at a rate of forty percent a year. This may be viewed as one of the reasons as to why there has been an acquisition. Buying Allergan will make Pfizer grow faster.
Therefore, the merger acquisition by Pfizer is not an unexpected occurrence. The company had to buy the medication that was available in the market. Pfizer has been investing a significant amount of cash in the in-house R&D. On the other hand, Allergan has spent considerably on buying drugs that are still in the discovery phase. In regards to the Allergan's strategy, it is assumed that these efforts aimed at buying target drugs will not have a significant effect on R&D operations (Mullard, 2016).
The merger between these two companies is crucial, since it will enable the innovation level to be boosted due to the influence of the new combined company. Due to this merger, the new business will, in turn, have the access to the necessary capital to invest in the research and development as well as the manufacturing of products. The CEO stated that the merger between the two companies was due to the revenue growth they would achieve in the U.S. and globally, as well. He also stated that the merger was also aimed at showing the significance of a combined research on new drugs and not directly reducing the tax that the company had to pay to the U.S government.
The analysis shows that the merger willintroduce Allergan to new markets that it has not accessed in the past (Gautam & Xiaogang, 2015). These markets are approximated to be around seventy. The Allergan's management said that the company's products were missing in some of the world's biggest pharmaceutical markets. He also indicated that Allergan's products were missing even in Japan, and they were looking for an effective way to ensure that the products would get integrated into the second biggest market for pharmaceuticals (Kmietowicz, 2015).
Nonetheless, investors feel that the U.S. government can affect this inversion and result in its failure. They believe that Pfizer and Allergan are not taking into account the rules of the tax inversion in the U.S. Thus, even if the merger happens, it will require a certain period to mature fully, and at this time, the United States government can ensure that it undercuts it. This merging issue has even attracted the political attention, and the presidential candidates commented negatively on this move by Pfizer (Khera, Mahawar, Cartwright, & Datta, 2016).
Pfizer, on the other hand, has been very keen in their quest of inversion, since they had a similar experience that was cut short by the government. This time, the company has made sure that it has covered every detail. Pfizer has successfully evaded the new rules that govern inversions by the United States Treasury. From a personal point of view, it is safe to say that the deal was made for Pfizer to reduce the tax charges and ensure its growth due to the products that have been produced by the Allergan's company, which will, in turn, promote its sales (Avi-Yonah, 2015).
Strategic Business Units
Pfizer has been able to set up seven strategic business units with a basis of therapeutic categories, which it has been focusing on. The objective of this strategic business unit is so that the company can approach the market in a scientific way. This is crucial for the company as it is expecting several new generation drugs from its global research and subsequent market suggestions. The disruptive innovation is a type of the innovation that helps in creating of a new market and value network and eventually disrupting the existing market and the value market (Christensen, 2015).
Since 2014, the Pfizer Company has divided its operations into two groups: one of the groups is innovative business products, while the other is certain business products. The innovative products industry is composed of two operating segments, namely the GIP segment and the GVOC segment (Gautam & Xiaogang, 2015).
Pfizer has created a fertile ground for disruptive drugs, because looking at the company's acquisition history, its recent trial to get AstraZeneca, and the fact that Pfizer is facing problems when it comes to drugs with a high potential for growth, it becomes clear that the company may continue to look for an even bigger acquisition. This is a notion proved by the Pfizer-Allergan merger, which is set to take place. It most likely has the market requirements to facilitate such a deal (Kollewe, 2014). Pfizer had a net cash balance of around $6 billion in the year 2014.
While this is certainly not a massive achievement for the Pfizer Company, it is clear that it can come up with enough debt and still structure the rest of the deal in stock if a prospect of a considerable acquisition, like the Pfizer-Allergan merger, comes to pass. Due to this merger, the company has created grounds for all kinds of disruptive products. This is because Allergan comes with their own pipeline of drugs; therefore, Pfizer will have to introduce them in their markets, which may end up disrupting the sales of their existing products.
In regard to the question whether it is the right time for Pfizer to acquire Allergan, it is crucial to note the fact that the U.S. government has adopted the revised laws for the inversion of companies. It is possible to say that the company picked the wrong time; however, owing to the fact that the company has tried to acquire many companies and has failed, then they may have what it takes to acquire Allergan this time, since they have the experience. The fact that they need the Allergan's pipeline of drugs in order to remain relevant in the industry is also another reason they chose the right time to merge. Therefore, the advantages from this merger outweigh the disadvantages, hence it is the appropriate time for them to acquire Allergan.
Merger between Pfizer and AstraZeneca
The Pfizer Company has a long history of making large acquisitions. Even though the CEOs have not supported the notion of using assets to ensure the growth of the company, they have subsequently made the most substantial acquisitions in the pharmaceutical industry. It has been a year, since the first merger attempt was made by Pfizer. The company admitted its defeat after a long pursuit of the corporation known as AstraZeneca. Pfizer had the vision of being efficient in producing new drugs, which were much needed in the market.
This was the reason why they followed that merger deal (Khera, Mahawar, Cartwright, & Datta, 2016). The AstraZeneca Company was in the process of heading downhill after they faced with the possibility of losing patents to some of the best selling drugs that they were producing. The merger with Pfizer would have enabled AstraZeneca to get back to business. However, this was not the case.
A takeover of AstraZeneca would have been highly crucial to Pfizer as it would have solved a few problems for them. One of the problems was the tax rate that the company had to pay the government. The other problem was the accumulation of a hefty amount of cash in overseas currency, which would have attracted a massive penalty if it was transferred to the U.S. Finally, the merger would have also solved the problem of an enormous pipeline of new drugs (Rowland, 2014).
When Pfizer initiated the acquisition, AstraZeneca gave investors the information that new drugs were on their way to shorten the fall. This optimism had only heightened in the following year as the analysis of clinical experiments proved the case for several potential investors. The only thing that analysts kept in mind was the fact that the pharmaceutical industry was facing a substantial pressure in terms of the growth. Therefore, there was a subsequent downfall in the R&D production. Due to those pressures in regard to growing, companies initiated deals in the industry, which were highly saturated with the stock and not the cash.
During the AstraZeneca merger warfare, Pfizer was accused of having a dormant drug pipeline, which analysts blamed of a free research and development by the team of scientists at Pfizer. In the past year, there was a better assessment of the situation, and different conclusions were made. The main reason as to why Pfizer was not able to merge with AstraZeneca was due to the fact the United States government tightened their inversion tax laws. This, in turn, made it hard for the Pfizer Company in terms of commencing the plan of taking over AstraZeneca (Kollewe, 2014).
Industry Dynamics, Strategy and Competition
The arrangement would perhaps promote the speedy rate of fusion in healthcare, whereby firms of all lines, namely from insurance to hospitals, have been trying to adjust to the remarkable change made possible because of the affordable care act and other progresses (Khera, Mahawar, Cartwright, & Datta, 2016). Apart from offering Pfizer the chance to reduce its corporate tax rate, the deal will potentially improve its sales and will allow meeting the cost-cutting chances. For Allergan, the merger will permit it to take sales that are mainly in the United States to other markets internationally.
Structure of the Deal and the Challenges the New Combined Firm May Face
The deal is organized as a reverse merger, whereby the smaller Dublin-based Allergan is acquiring the New York-based Pfizer, and it is believed to mend the concern over inversions, where the United States organizations are purchased by or combine with foreign firms in a bid to lower the tax troubles. The Allergan's and Pfizer's combination may become excellent for the firm in the end, but it entails short-term difficulties for retail investors. It can also be viewed as Pfizer experiencing regulatory hardships caused by its suggested merger.
However, the company will potentially gain from the swift growth of Allergan (Rowland, 2014). After surviving with sales lost at the time, when best-sellers, like the cholesterol-fighter Lipitor, experienced a generic competition, Pfizer has realized achievements after establishing new drugs such as the breast-cancer tablet Ibrance. The merged company will perhaps outdo the industry performers, such as Novartis and Johnson & Johnson, in terms of the market value and sales.
While Pfizer stands to lose a lot if the merger deal does not work, it will also gain a lot if the deal succeeds. The company has already experienced one disappointing merger deal previously; yet, the CEO does not give up. If the Pfizer-Allergan merger is successful, it will be the second inversion in the increasingly difficult world of tax inversions.
This is because the U.S. Treasurer has created a number of issues in this process with the aim of making it increasingly hard for companies to pull off a tax inversion. The nature of the deal is rather odd, since on the records. it is Allergan that will be buying Pfizer. However, the CEO of Pfizer will be the one who heads the newly merged company.