Why pay $100B for AstraZeneca? Let Pfizer's CEO count the reasons

Pfizer CEO Ian Read

Pfizer ($PFE) considers itself a megamerger expert. And it's hoping to prove that with another megadeal--a $100-billion-or-so buyout of AstraZeneca ($AZN). After last week's headlines about a possible buyout, both companies confirm that Pfizer is hot to trot and ready to parley.

AstraZeneca? Not so much. The company issued a statement Monday morning, saying that its board decided it's "not appropriate" to talk merger with Pfizer. Yes, Pfizer CEO Ian Read contacted AZ Chairman Leif Johansson in November. And yes, the two companies met in New York in January, where Pfizer made an offer.

But AstraZeneca rejected that £46.61-per-share bid, a 30-70 cash-stock combo. Until Pfizer delivers "a specific and attractive proposal"--preferably with a bigger share of cash--no talks are necessary.

One big reason why some analysts are all for the deal is one reason why AstraZeneca might not be. In a word? Synergies. Pfizer sees big opportunities for cost cuts; ISI Group analyst Mark Schoenebaum ballparks that expectation at 25%. As the product of one major merger after another over the past couple of decades, Pfizer has a history of shedding many thousands of jobs and billions in costs. "We have a strong track record on synergies," CFO Frank D'Amelio said during a call with investors and analysts Monday. "It's something we are very good at doing."

When the company bought Wyeth in 2009, Pfizer initially said it would slash $4 billion in costs and cut payroll by almost 20,000. D'Amelio said Monday that half the cuts hit SG&A, the other half affected R&D and manufacturing--and overall, Pfizer was able to cut more than $4 billion. Unsurprisingly, those cuts fell disproportionately on legacy Wyeth operations.

AstraZeneca has little reason to expect different. Read says he doesn't yet know exactly where the cuts might come, and decisions would be made in concert with AZ management.

Pfizer has a laundry list of other reasons why buying AstraZeneca makes sense--for instance, adding strength and savvy to its operations in its already-extensive therapeutic areas such as cardiovascular drugs; and pumping up its offerings where it's weak, such as diabetes and vaccines.

And on a call with analysts and investors, Read emphasized the fact that buying AZ would fit right in with his plans to eventually spin off one or more of the three operations divisions he created last year. AstraZeneca's older meds would add heft to the established products division, for one thing, and its pipeline would strengthen the other two units, which focus on new prescription meds and consumer health. The stronger these businesses are, the better for a split-up, Read said.

So, should investors continue to expect an eventual split into two separate publicly traded companies, as Bernstein analyst Tim Anderson asked? "This potential combination is exactly on strategy and should strengthen the beliefs they held previously," Read said.

Another driver? Tax savings. Pfizer proposes to combine the two companies under one U.K.-based umbrella, which would give the combination a U.K. domicile and U.K. tax rate. Among the tax advantages is the "patent box" recently put into effect, which offers breaks on the profits from IP held in the U.K.

One of the long-held criticisms of megamergers in general--and Pfizer's megadeals in particular--has been that these mergers put a damper on innovation. As R&D operations are cut and merged, the focus shifts from science to integration, and that stalls progress, or so the theory goes. Analysts raised that objection during today's call. Read would have none of it; combining Pfizer and AstraZeneca's pipeline and research work will boost innovation, not hurt it. "I don't view it as a distraction," he said.

- see the Pfizer confirmation
- get the statement from AstraZeneca

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