June 25, 2014
By Karl Thiel for BioSpace.com
Pfizer has officially thrown in the towel on Astrazeneca, but the genie is out of the bottle, and merger madness is upon us. Not to be put off by Pfizer’s recent experience, AbbVie has decided to go after Shire, also hoping to take advantage of the so-called tax inversion that will come from relocating their place of incorporation to relatively low-tax Ireland. (And they’re not alone—Medtronic just agreed to buy Irish device maker Covidien for $43 billion for the same reason).
In this case, Shire has its playbook readymade: In its effort to stave off takeover, it’s going to do what just worked for AstraZeneca. It is arguing that it is undervalued, pointing to some long-term internal projections that may be a tad more optimistic that what most analysts expect, and highlighting the domestic impact of the takeover in an effort to whip up public and political sentiment against the deal. Will this work? Hard to say, but in terms of politics, Shire doesn’t have the same clout as AstraZeneca, so if AbbVie is willing to dig deeper into its pockets, it may yet be able to snag the company.
Ironically, a proposal in the Obama Administration’s draft budget aimed at limiting inversions is actually fueling this frenzy. Buried deep in the $3.9 trillion budget—but very much noticed in board rooms—is a proposal that would make inversions exceedingly difficult by allowing them only for U.S. companies that transfer over 50 percent of their shares to a foreign entity—in other words, “acquiring” a bigger company than themselves. While it’s far from certain this will become law, the very existence of the proposal heightens the sense that companies looking to replant their flags on foreign soil better do it quickly.
Bills introduced by Democrats to put a halt to inversions are described as protecting jobs by stopping U.S. companies from moving their operations overseas. But many inversions are really more of a change of address. Drugstore chain Walgreens, for instance, is pondering an inversion based around its acquisition of Swiss-based chain Boots, but it’s highly unlikely that such a move, if it happens, will result in significant stateside job cuts. After all, Walgreens generates most of its revenue from U.S. stores, and that’s not going to change.
With pharma mergers, however, it’s a different story. An Pfizer-AstraZeneca tie-up would almost certainly have meant major layoffs. But where would those cuts have taken place, in the U.K. or the U.S.? As tension around the inversion issue heats up, foreign companies and governments are getting more serious about blocking takeovers and U.S. companies are getting more desperate. The price tags of assets are rising and the political promises are likely to get richer. Every extra billion Pfizer was willing to pay for AstraZeneca, and every promise it made not to cut U.K. jobs in hopes of sealing the deal, meant money that had to be saved elsewhere. In other words, it meant more U.S. job cuts to pay for those premiums and promises.
That’s an additional irony: The frenzy to make this happen before the law changes may make the U.S. feel a disproportionate share of the impact, not just from an eroding tax base but from lost jobs.
Is Any Of This Good For Business?
Of course, not all major merger talks going on right now are about taxes. One of the more entertaining hostile takeover efforts is a Canadian company trying to swallow a U.S. entity.
Valeant Pharmaceuticals is making a valiant effort to convince Allergan shareholders that it is doing them a favor by acquiring a moribund company that can no longer innovate. Forbes’ Matthew Herper has a great article on how misleading Valeant’s management is being in its characterization of the R&D record of pharma in general and Allergan specifically.
Moreover, investors who share Allergan’s concerns about Valeant’s business model—which it characterizes as unsustainably relying on acquiring companies, slashing costs, and reducing risks by giving short shrift to R&D—just got some interesting validation. Morgan Stanley, which is acting as an advisor to Valeant, had first approached Allergan to offer its services in fending off the unsolicited bids. In emails recently released by Allergan, the bank describes Valeant as a “house of cards” (or at least indicates that this would be the most effective way of positioning it in the media).
The public battle doesn’t seem to have done either company much good, but Valeant’s stock in particular has taken a shellacking in the past month, off about 10 percent in June as its arguments about what’s wrong with everyone else in pharma seems to only draw more attention to its own business model.
At one point, Allergan was itself reportedly looking to acquire Shire in an effort to fend off Valeant, although that seems unlikely to go forward at this point. The common thread through all of the these proposed mergers is that they’re more about short-term maneuvering than about long-term business synergy.
-Karl Thiel
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