What Pfizer / AstraZeneca really meant to the M&A landscape

Kevin Chupka

As is true in business so it is in life: just because someone really, really wants to be with you doesn’t mean you can play hard to get forever. After six months of courting AstraZeneca (AZN), Pfizer (PFE) announced it had pulled its $118 billion offer and had no plans to attempt a hostile acquisition.

Under UK takeover rules Pfizer can submit another bid for AstraZeneca in six months, though the company sounds like it’s had about enough of the cat and mouse game. “We are now moving on,” said Pfizer CEO Evan Read, “We have no idea whether we’d be interested in AstraZeneca at any point in the future.”

In choosing to reject Pfizer, AstraZeneca is leaving a 30% premium on the table from where AZN is currently trading. In the attached clip Raymond James’ Jeff Saut says AstraZeneca’s rejection is a sign of the times in a deal-crazy year.

“Unless my pencil is broken, I think we have more M&A activity this year than we’ve seen in decades,” says Saut. “I think that’s very positive for corporate America. I also think it’s a sign that cap ex is going to pick up here in the not-too-distant future.”

Capital expenditures are what companies do when they can’t find deals and are forced to grow by buying those belonging to other people. While buybacks and deals have been running rampant, there hasn’t been a surge of spending during this recovery. The lack of spending is one reason this recovery has lagged in terms of employment and GDP growth.

Does the US Tax Rate make us uncompetitive?

Of course it wasn’t just a drug pipeline that Pfizer found appealing about AstraZeneca. As a UK domiciled firm, AstraZeneca pays a lower tax rate than Pfizer. A big part of the appeal from Pfizer’s perspective was the ability to move its official tax residence to the UK, even if that didn’t mean transferring much in terms of operations.

Suffice it to say US lawmakers weren’t thrilled at the prospect of such a move taking place. Expect them to do what they can to make it more difficult for US corporate citizens to pick up stakes and move to the highest bidding foreign nation.

Neither Pfizer nor AstraZeneca is likely to collapse just because this deal fell through, but investors missed a chance to catalyze some proactive legislation regarding mergers. Between these tax arb opportunities and the much discussed trillions worth of dollars parked overseas, America seems to be having a hard time figuring out exactly how it fits in the corporate world.

Washington, DC being what it is in terms of efficiency, it’s likely that the huge gap between US and foreign tax rates will result in America losing an huge corporate citizen before politicos get serious about solving the problem.

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