Mega-Merger Madness

“Is that your final answer?”

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

By |2014-05-20T09:44:56+00:00May 20th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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