By Howard Gold
Pfizer stunned Wall Street two weeks ago by announcing a $100 billion-plus bid for Swedish-British drugmaker AstraZeneca.
It was especially jaw-dropping since $200 billion in acquisitions by Pfizer (PFE) over the previous decade were accompanied by a sharp decline in its stock price.
In fact, Pfizer's chairman and CEO, Ian Read, appeared to rule out such giant acquisitions just two years ago in favor of cutting costs and returning money to shareholders.
But now, the Scottish-born chartered accountant has a grand plan to make over the dowdy pharmaceutical behemoth through a simultaneous mega-acquisition and a vast restructuring of Pfizer's businesses, plus relocating its corporate and tax domicile to the United Kingdom.
That could save Pfizer $1 billion in U.S. corporate taxes annually and free up tens of billions of dollars it has locked away abroad.
Amid a firestorm of criticism, Pfizer has now made a legally binding pledge to keep AstraZeneca's (AZN) British research facilities open for five years and to keep 20% of its research staff in the U.K.
But on Tuesday, Read acknowledged to British MPs that "there will be some job cuts" and reductions in the combined companies' research and development spending. He couldn't say "how much or how many or where," but I'll bet Pfizer's U.S. operations will take another hit.
Such grandiose deals rarely work out, and Pfizer's hugely ambitious megamerger, restructuring, and relocation make the odds even longer.
Yet Read should do fine no matter what: He could leave the company today with compensation, stock and benefits worth over $160 million, according to Equilar, a Redwood City, Calif.-based executive compensation and corporate governance data firm. That approaches the notorious $188 million departing CEO Hank McKinnell received back in 2006.
That was Pfizer's Decade of the Megamerger. In 2000, it paid $90.3 billion in stock to acquire Warner-Lambert and its super-blockbuster anticholesterol drug, Lipitor, which produced as much as $13 billion in annual revenue until it went off patent late in 2011.
Then in 2003, it acquired Pharmacia for $60 billion in stock. In 2009, it paid $68 billion in cash and stock for Wyeth, a deal then-CEO Jeffrey Kindler declared was not about "a single product or cost cutting." Pfizer promptly cut 15% of the combined companies' workforce, about 20,000 jobs.
In announcing the AstraZeneca deal, CEO Read declared: "Pfizer has a proven track record of successful acquisitions."
Really? A recent report by consultancy McKinsey & Co. said the Warner-Lambert deal "drove significant value creation for shareholders..., aided by the wildly successful growth of Lipitor." But, it declared, "the Pfizer-Wyeth merger resulted in an overall decrease in economic profit for Pfizer" -- a 26% decline, McKinsey estimated.
Shareholders could be forgiven for not seeing any value at all. The stock dropped by nearly two-thirds from its all-time high in July 2000, shortly after the Warner-Lambert acquisition, through Oct. 15, 2009, when the Wyeth deal closed. That was much worse than the S&P 500 Index's 26% decline during that time.
Since 2000, Bloomberg reported, Pfizer has introduced just three "blockbuster" drugs (which generate more than $1 billion in annual sales), the same number as Bristol-Myers Squibb (BMY), which spent a tenth of what Pfizer did on deals.
Not a lot of bang for a whole lot of bucks!
-Howard Gold; 415-439-6400; AskNewswires@dowjones.com
No wonder Read told investors in May 2012: "...Well, never saying never, I certainly don't see any opportunity in larger-scale acquisitions that would be a prudent use of our capital."
Since he took the top job in December 2010, he's been focusing the company's research on several commercially promising areas.
"Pfizer has been in the midst of an R&D turnaround," a company spokesman told me. "We've made a concerted effort to fix our innovative core."
Meanwhile, $1 billion in annual expense cuts, along with spinoffs, asset sales, dividend hikes and share buybacks, have helped Pfizer return $53 billion to shareholders over the past three years. The stock has doubled since Read took over, performing twice as well as the S&P 500.
So, why rock the boat now? Pfizer claims the merger is driven by three factors:
--The complementary nature of the two firms' drug pipeline
--Improving the efficiency of the organization
--Financial opportunities related to the balance sheet, of which taxes are a part
The deal is not entirely based on tax arbitrage. But by shifting its tax domicile to Britain, Pfizer would pay a 21% corporate tax rate vs. a 27.4% effective rate in the U.S., potentially saving $1.2 billion annually in taxes. It also could use its $57 billion in offshore cash much more freely.
And there's a special British "patent box" tax under which profits earned from patents created in the U.K. are taxed at an even lower 10%.
Read has reorganized Pfizer into three groups: Global Innovative Pharma, where the cutting-edge drugs reside; Vaccines, Oncology, Consumer Health, which feature new and established drugs in those areas; and Global Established Products, including older drugs and those like Lipitor whose patent protection has expired.
In a slide presentation, Pfizer helpfully laid out which AstraZeneca products would go into which group. It may be too clever by half. Telling AZ how it would break up that company may not win friends and influence Brits. And it's hard enough to integrate two giant drug companies in a straight merger; combining that with a massive restructuring looks like a bridge too far.
"The best deals are pretty focused -- in adjacent areas," Robert Bruner of the University of Virginia, who wrote a book on big mergers called "Deals from Hell," told me. When firms go too far afield geographically, they're asking for trouble. And too much complexity is the enemy of success.
But success is one thing Ian Read should enjoy regardless.
If he were to leave Pfizer today, his total severance, accelerated equity, deferred compensation and pension benefits accumulated over 35 years of service would be worth $129.8 million, according to Equilar.
Adding $21.4 million in shares owned outright and another $9.4 million in options and restricted stock units -- and avoiding double counting -- Equilar estimates that Read could take away $160,675,179, among the richest corporate severance packages ever.
No wonder he called the AstraZeneca deal a "win-win" for everybody. But it would more likely be a lose-lose for Pfizer shareholders, the U.S. Treasury and thousands of employees of the two companies if this latest "deal from hell" goes through.
Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.
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-Howard Gold; 415-439-6400; AskNewswires@dowjones.com
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05-15-14 0616ETCopyright (c) 2014 Dow Jones & Company, Inc.