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Speed kills

29 October 2015 By Robert Cyran

Pfizer may be about to overdose on quick and complex deals. The drug giant is in talks to buy $120 billion rival Allergan and seems likely to split the merged firm. It’s moving briskly to take advantage of low share prices and tax benefits that could vanish with a new Congress. Speed can prompt missteps, though, as Pfizer knows only too well.

The potential deal is emblematic of a healthcare M&A frenzy. Allergan has already been a target this year, selling itself for $66 billion to generic-drug firm Actavis, which took the Allergan name and then sold most of the original Actavis business to Teva for $40.5 billion. Now Pfizer is contemplating a similarly convoluted transaction.

The main attraction is low overseas tax rates. Acquiring Ireland-based Allergan would allow Pfizer to pull off a so-called inversion, shifting its corporate home to that nation and cutting its tax bill some $2 billion a year.

The deal would also strengthen Pfizer’s case for separating into two companies, one selling branded drugs and the other generic and older drugs. Allergan is big in the branded sector and growing faster than Pfizer. Hospira, which Pfizer acquired earlier this year for $15 billion, specializes in injectable generics. Pfizer has already spent more than $300 million preparing for a split, and its stock price has doubled since it started selling and spinning off assets five years ago. The Allergan transaction could put in a solid position to create two pharmaceutical powerhouses.

The company needs to move quickly, though. As Chief Executive Ian Read pointed out this week, 2016 U.S. elections could bring a new Congress inclined to eliminate inversions. What’s more, healthcare companies have lost value since summer, and Allergan is worth 10 percent less than it was three months ago, even after the news of a possible merger. Pfizer undoubtedly hopes to persuade Allergan that lower valuations are here to stay.

The faster it moves, though, the greater its chances of making a mistake. Pfizer’s M&A track record is already less than stellar. The company was worth about $140 billion in 2000, before it spent more than $235 billion acquiring rivals. It’s now worth $213 billion.

There may be good reasons for doing this deal. Considering Pfizer’s history, though, there’s even more reason to exercise caution.


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