May 27, 2014

At just shy of $US 120 billion drug giant Pfizer Inc.’s (NYSE- PFE) proposed (and now withdrawn) bid for UK-domiciled pharmaceutical firm AstraZeneca plc (LSE – AZN) was of note on several levels. It was enormous, it inspired political debate, it failed rather publicly, and above all it was seemingly an example of tactics undermining strategy.

The strategy – to create a global pharmaceutical behemoth able to capture cost and operational synergies and expand a pipeline of cancer-fighting drugs– was clear. The tactics may well have been botched.

Great Britain has a substantially more formal M&A process than other countries. British takeovers are governed by the appropriately named Takeover Code and the rules overseen by the eponymous Takeover Panel. The Code – a 390 page doorstop of a document – is “designed principally to ensure that shareholders in an offeree company are treated fairly and are not denied an opportunity to decide on the merits of a takeover…”. It imposes formal procedures and set of deadlines that are not found in North America.

A key element of these rules is a one month deadline between the public disclosure of a potential acquirer’s interest and a requirement to make a formal offer to shareholders. The intention of this deadline (shortened since Kraft purchased iconic chocolate maker Cadbury four years ago) is to avoid a state of affairs wherein management of a target is essentially under siege for a protracted period of time.

On 19 May 2014 AstraZeneca formally rejected the offer and a few days later Pfizer withdrew its bid. With the withdrawal of its offer Pfizer is now precluded from re-initiating an approach for six months (unless AstraZeneca extends an invitation to do so). How did things come unstuck?

First of all – and perhaps least important in the overall scheme of things – Pfizer made no secret of the fact that a significant driver of the transaction was a desire to perform a so called “tax inversion” whereby an acquirer would assume the tax domicile of its target. Given that the US has higher-than-average corporate tax rates this had obvious benefits for investors. The challenge in conveying this to investors lay in the fact that it also raised the ire of certain prominent politicians. By placing rather more emphasis on tax benefits than on industrial logic it probably also proved less than inspiring to longer-term shareholders. Likewise the possibility of the deal created angst in the UK: loss of another “national champion” was feared (even if AstraZeneca more closely resembles a stateless multinational with limited attachment to the location of its head office). Debate in the UK Parliament included assertions that Pfizer had a history of massive takeovers followed by equally massive sackings. This political mood music was unhelpful, though far from a determining factor.

The first derivative of the political debate was a failure to present a combined and positive cultural orientation. Pfizer allowed itself to be painted as a ruthless American cost-cutter whilst AstraZeneca presented itself as a European champion of science. The truth in these situations is always much more nuanced.

Secondly the approach (at least for now) appears to have foundered on tactical execution. In the commentary and mutual recrimination after the deal talks ended it was a reasonable assumption that AstraZeneca viewed Pfizer as having turned a friendly approach into a hostile one.

Talks apparently began in November of 2013, when Pfizer’s CEO reached out with a framework offer combining an attractive premium (undefined, as we understand it) and a promise of a headquarters move to the UK to capture the lower tax rate. This prompted a meeting at the Pierre Hotel in New York in January attended by both the CEO and Chairman of AstraZeneca. There Pfizer tabled an offer about 30% higher than AstraZeneca’s share price: basically close to the market average merger premium.  AstraZeneca balked at the price (hardly an unexpected negotiating response) and were apparently surprised when Pfizer rapidly backed away.  By way of context, Pfizer’s initial bid was £46.61.

AstraZeneca’s response was swiftly proved more than mere deal posturing. Over following weeks AZN began informing analysts and investors to anticipate better than expected results. Equally pertinent the pharmaceutical M&A market heated up (please see our recent blog post on this topic).

By April Pfizer apparently reached out again, hoping that the two companies would issue a joint statement detailing takeover talks. AZN’s CEO is said to have refused to do so in the absence of a better, more serious offer.

That offer – an even £50 – came on 2nd May, a date that marked the start of the one month countdown alluded to above. The political temperature, as mentioned above, rose and Parliamentary hearings were scheduled for 13/14 May.

Throughout this period Pfizer apparently began to feel that AstraZeneca was rather more polite about the takeover process than enthusiastic. The Parliamentary hearing did not, if press reaction is a guide, go terribly well. Despite a promise to base a fifth of the research and development workforce in the UK, headlines were dominated by fears (sparked by AXN’s CEO) that certain drugs might experience delays due to the merger integration. Simultaneously certain large investors – BlackRock seemingly notable amongst them – were reported to be unhappy about the proposed price.

Pfizer’s next move was to raise the bid price to £53.50. This was done by letter on 16th May. Reports suggest that AZN then invited PFZ’s CEO to London to continue negotiations, but the growing tensions between the sides are said to have led PFZ’s CEO to refuse a face-to-face meeting and instead propose a conference call. Some observers have said that this was designed to avoid potential embarrassment.

AZN’s board met the following Saturday. Prompted by many – though not all – significant investors – the board voted to formally reject the proposal. In a meeting the following day (Sunday) the board is reported to have coalesced around a price of just shy of £58.85: basically 10% above what PFZ was offering. Attaining this price and offering (as AZN’s board suggested) some additional, politically sensible, guarantees could have closed the transaction. AZN proposed this in a conference call with PFZ. The call proved inconclusive. AZN’s board of directors clearly followed correct governance: they did not reject a deal out of hand: they both outlined a price at which they were willing to forego independence as well as outlining key non-financial, integration issues that had to be addressed in any deal construct. This was not a “just say no” defence.

In a logical move, but one that had collateral impacts on the relationship with AZN’s board, PFZ then decided to try and alert the Takeover Panel (as required) of a “final”, basically take-it-or-leave / like-it-or-lump-it offer of £55. The audience for this was the institutional investor community, not AZN’s board. After some abortive attempts to reach the Takeover Panel the press release was issued.

In so doing Pfizer rubbed the AZN board the wrong way whilst failing to address the concerns of the UK government about losing a national champion (and those of the Swedish government about job losses). They also left as an open issue U.S. Congressional ire about the tax inversion. Finally, the price did not woo enough institutional investors.

It remains to be seen whether AstraZeneca, which has now talked about boosting revenues from $25 billion in 2013 to $45 billion in 2023, will retain investor support or whether a change in results (or the market) will provide Pfizer with an opportunity. In the latter event it is clear that any revised offer will come with substantial baggage from the deal tactics of the first approach.