The Failings of Pfizergan
Tax-driven M&A is not a valid strategy
Pfizer terminated its proposed takeover of Ireland-based Allergan last month, after the US treasury tightened regulations on corporate tax inversions.
Of all the reasons to expand a business, tax benefits have got to be the worst. First and foremost M&A needs to make sense from an operational perspective. The combined business should be a more effective competitor, delivering better products for its customers. And, in turn, create long-term value for shareholders.
This view was not part of the Pfizergan playbook. It was a deal driven purely by the insatiable desire of Pfizer’s CEO, Ian Reed, to limit the company’s tax bill. I say insatiable because this is not the first time Pfizer has botched a tax-driven takeover. In 2014, Pfizer bid for Astrazeneca, the London-listed pharmaceutical firm, but the deal was rejected by the acquiree’s board, who prioritised independence and pipeline strength.
The FT reports that Pfizer has also considered bids for several other overseas companies, including Canada-based Valeant (of accounting irregularity, SEC investigative, price-gouging, C-suite dismissal fame) and GlaxoSmithKline, the UK-based stalwart of the healthcare industry.
The estimates vary, but if Pfizer was to invert its headquarters to a low-tax jurisdiction it would expect to shave approximately 10% from its effective tax rate. This would allow it to repatriate and deploy billions of dollars worth of foreign cash (without handing chunks to the US government), but the holistic impact of the transaction must also be accounted for.
If the operational benefits of a deal are not primary, or do not even exist, then the risks and costs associated with integrating large and complex entities invariably outweigh the financial gain.
And lets be clear, most mega-merger M&A is considered to be value-destroying. So even if the Pfizergan combination was driven by a complementary R&D strategy, as the biggest corporate transaction of all time (valued at approximately $160bn) I bet my left arm it would have been destructive to shareholder value.
Now that the merger has been abandoned, it is clear that Pfizer’s only argument in support of the deal was gaining a tax benefit.
Let me just emphasise this point. Ian Reed is at the helm of the largest pharmaceutical firm in the world, and instead of using the company’s resources to invest in new treatments, he has chosen to focus his tenure (unsuccessfully) on financial engineering.
For me, this is another stark example of poor leadership in the pharmaceutical industry (building on the Valeant saga, but also the Skrehli debacle). The common denominator is a lack of scientific capabilities and healthcare-specific expertise, and that is no real surprise.
An auditor by trade, Reed has even defied his professional training and shown a remarkable inability to estimate risk. He assumed the Obama administration would pass on adapting the tax regulations during its last year of office, which turned out to be a fatal error for the Pfizergan deal.
Pharmaceutical investors should question any management team that have so few ideas, they advocate a destructive tax dodge as a driver of growth.
How about investing in affordable and effective treatments, eh?
