Merger Mania: When the Music Stops

Clifford Kalb

As expected, the PFE/AZ saga has just begun to play out, and as we listen to the music of mega-mergers once again, I suspect that we will shortly be entering a transition where the tone will become a bit more hostile.

Pfizer has been down this road before, when the deal to buy Warner Lambert in 2000 for $90 billion turned somewhat hostile. At the time, American Home Products made a competing bid and ultimately Pfizer took out Warner Lambert.  Once the merger was completed, industry insiders joked that the only thing that remained of Warner Lambert culture in the new Pfizer were the letters “e” and “r” in the Pfizer name. In 2003, Pfizer swallowed Pharmacia ( which now included legacy Searle and Upjohn), and kept the letter “p” in the name of the new company.  Most recently, the merger with Wyeth in 2009 occurred, which could only deposit another “e” behind. Perhaps one way of looking at the potential deal to buy Astra Zeneca will be viewed retrospectively in a similar context, i.e., only ultimately contributing the letter “z” to the name of the new company.

Sure there were synergies, yes there was facility rationalization, “right sizing” of duplicative programs, and a temporary jump in market share and market cap, in each of these cases. However, if mega-mergers are a source of sustainable competitive advantage in pharma, then why does a firm who grows via this strategy have to keep doing them?  Aren’t they really simply a way of buying time to carry a firm over it’s next major patent cliff until it has to be done again?

Some believed the transition to Ian Read as the new Pfizer CEO in 2010 was a defining strategic moment in recent Pfizer history.  He was to be the leader that would refocus the firm on core competencies in drug discovery, development and marketing, and break the “merge to grow” pattern established by his predecessors. The evidence pointed that way with the prudent, systematic execution of a plan to shed some non-core assets, like nutritionals and animal health. He then telegraphed the analyst community of the longer term plan to split the company into separate divisions, each with their own financials and distinctive business plans. Wall Street warmed up to the idea and investors pushed up the stock value, believing that a more sound path to growth would be re-organizing into smaller units, more easily able to grow from a smaller base. This seemed more pragmatic than attempting to overcome the law of large numbers, struggling to steadily grow a $60+ billion behemoth in a business as risky as big pharma.

So why the sudden change in strategy? The current claim is that the separate division strategy is still in place, and that the A/Z portfolio would be broken up to supplement each of the new units, and other non- core assets sold off. There is some credibility to this rationale. However, the underlying driver appears to be the tax benefits of the transaction by re-domiciling Pfizer in the UK to take advantage of the lower tax rates on billions in cash being held overseas. While this would certainly result in some tax savings, I suspect the amount pales in comparison to cost reductions expected from making thousands of people redundant, the closing of facilities, the shrinking of the overall commitment to R&D, marketing and production. This says nothing of the brutally distracting cultural integration all the employees would face for a fourth time in the last fifteen years. It’s terribly sad that the human tragedy of the impact of these mega-mergers on people’s careers, their lives, their families, and their futures never seems to make it to the headlines.

Permit me a bit of fantasy. Wouldn’t it be nice if we later found out  that the real underlying rationale for this merger proposal was to wake up our law makers in Washington from their Rip Wan Winkle like sleep regarding our corporate tax policy and force them to act?  A sizeable number of deals have occurred recently to avoid this albatross on our competitiveness as a nation, but none the size or scope of an iconic Dow firm like Pfizer wanting to leave the country because legislators cannot agree on a deal where there already appears to be bi-partisan support in Congress.  Even a more modest step in the right direction would be if our friends in government could agree on a simpler scheme, allowing overseas profits to be repatriated on a one time basis at an attractive tax rate.  If they moved quickly enough to push legislation through in time to get Pfizer to abandon this deal and let them (and all the major multinationals) bring back the trillions being held overseas, just imagine the massive positive impact on job formation and capital investment to be made right here in the US.

If there is one thing that is certain, the music on this mega merger game of musical chairs hasn’t yet stopped. Wouldn’t it be wonderful to see an American chair available for everybody when the last note of the music is played?

Clifford Kalb (ckalb55205@aol.com) is President and Owner of C. Kalb & Associates and a member of Pharmaceutical Executive’s Editorial Advisory Board.