That was the question that Regis Philbin would ask contestants on “Who Wants to be a Millionaire?” And it’s the question AstraZenica put to Pfizer in the latest pharmaceutical mega-merger. So far, AstraZenica doesn’t like Pfizer’s answer. They want more money.
Mega-mergers are a funny business. Two giant organizations seek to combine operations and bring efficiencies and synergies to their businesses. Efficiencies can often come from combining accounting, finance, and other administrative functions, although that’s not so simple with huge organizations. Synergies come as sales staff can offer related products, encouraging customers to find exactly what fits their needs. But it’s easy to overestimate the benefits. So why are mega-mergers so popular?
In the past two decades mega-mergers have been routine among pharmaceuticals: Pfizer-Pharmacia ($60 billion), Merke-Schering Plough ($40 billion), Glaxo-SmithKline ($70 billion). Unlike many mergers, especially among technology companies, pharmaceutical mergers over this period have typically increased margins and expanded sales, adding to shareholder value.
Part of the reason is in the nature of the drug business. Bringing a new treatment to market is incredibly complex. There are tests and approvals and sales hurdles to overcome that require a lot of capital. As buyers of healthcare have consolidated through government policies and insurance-company mergers, it makes sense that providers would combine as well. And in this case, Pfizer would save billions by switching its home base to the UK, where taxes are lower.
Still, it’s easy to overreach. You can’t blame AstraZenica for wanting more. At some point, though, a high price makes a merger uneconomic. Pfizer has been pretty disciplined in its dealmaking in the past. For their shareholders’ sake, let’s hope they remain so.
Douglas R. Tengdin, CFA
Chief Investment Officer