Pfizer and Allergan: Viagra Meets Boxtox

I can't wait to hear the late night talk show hosts talk about a merger between the makers of Viagra and Botox!  But we'll confine ourselves here to the more technical aspects of this deal.  There are many interesting aspects to this one including the size of the deal, the continuation of industry trends, the creation of a giant in Pharmaceuticals, the current price movements of the bidder, target and competitors, the possibility of an inversion, and the social terms of the deal.

First, this deal could be the largest deal of the year as Allergan has a market cap of $112.5 Billion and Pfizer has a market cap of $219 Billion - this year is on pace to be the biggest year yet in M&A.  Second, it continues the consolidation trends we have seen in the pharmaceuticals industry.  Third, it creates the world's largest drugmaker.  The combination would surpass Johnson and Johnson (currently valued at $278 Billion).

The deal would be an inversion, as Allergan is headquartered in Ireland with a far lower tax rate than Pfizer faces in the US.  Expect the US government to seek to impose restrictions on the move putting the tax benefits of an inversion in question.  See our posts about inversions (here, here and here) and the folly of governmental attempts to restrict inversions rather than addressing the root issue and making domicile in the US more attractive.

The price movements at the announcement were typical for the bidder and somewhat abnormal for the target.  The bidder lost a few percent while the target shares rose only 8%. Typical price jumps for the target would be in the 20% - 40% range.   

We've noted many times in these pages about the impact of mergers on rivals.  In particular, our research has shown how the rivals of bidders and targets react to deals involving a competitor.  In today's case, the Guardian reports that the prices of two competitors (GlaxoSmithKline and Shire) declined in value as there was some anticipation that they would be Pfizer's target instead of Allergan.  This illustrates both the anticipation effects embedded in a firm's stock price and the reaction when those anticipated effects are put into question.  Many social terms of the deal remain to be determined, including what happens to Allergan's CEO and how many layoffs might occur as part of the deal.  

One senses that in this market, there is more to come.  There will be a lot to talk about during our December course in Amsterdam.

All the best,

Ralph