Christy Burzio, PhD Candidate, King’s College London
Business Commentary and Round-up of the News.
It’s been no secret that I have been closely following this deal, whilst a commercial and competition law enthusiast, I am also known for endlessly talking about my work. The reason being is that this particular deal is iconic. It has been one of the more fascinating and bitterly contested battles the city has witnessed in recent years, and could have resulted in the biggest-ever foreign takeover of a British company, creating potentially the world’s largest pharmaceutical group. Therefore, it comes as no surprise that both AstraZeneca, and my colleagues alike, are relieved that the deal has fallen through. But, is this the final curtain call for the seemingly failed deal?
The History of the Deal
The sour conflict began respectfully on 25 November 2013. Ian Read, Pfizer’s chairman and chief executive approached Leif Johansson, AstraZeneca’s chairman for an ‘exploratory meeting’ on 5 January 2014. At this meeting Pfizer makes a £59bn offer to AstraZeneca, comprising 1.758 shares plus £13.98 cash per AstraZeneca share, a 70pc/30pc split. This is swiftly rejected on 12 January 2014. Pfizer retreats, but makes a comeback in April, flying top executives into Britain to meet investors and politicians on a campaign tour of support.
Then, the day had arrived, the moment we had all been waiting for, on 2 May 2014 Pfizer makes a second offer: £63bn, comprising 1.845 shares plus £15.98 in cash per AstraZeneca share, keeping the same 70pc/30pc split. AstraZeneca retaliated by taking matters into their own hands and started to become extremely defensive. It started to make its public case against the deal. It claimed that it’s string of new drugs could nearly double revenues. The deal was gaining a lot of attention, so parliament did what it does best, and decided to publicly grill each side with no regard to commercial secrecy. My favourite highlight of the questioning was Pascal Soriot’s unsupported claim that the takeover could cost lives due to delays to delivering critical drugs.
Surprisingly, when everyone thought Pfizer would back away from the media spectacle that was now this deal, it raised a third offer: £67.5bn with a 60pc/40pc shares to cash split and the two boards hold private discussions. On 18 May 2014, AstraZeneca rejects third offer and Pfizer goes public with final proposal of £69bn, stating that it will not go hostile if this bid fails. On 19 May 2014 AstraZeneca rejects ‘final’ offer, and Pfizer admits defeat adding that there was ‘nothing more we can do’.
The Wider Implications
The same promises that you pledge as a board in order to reject a bid, such as the one posed by Pfizer, are the same ones that you will be held accountable to by shareholders. A word of caution is therefore always offered, to boards who think about the short term goal of blocking a deal, without considering the long term bind that they tie themselves into.
The particular question which remains on everyone’s lips: Are these pledges something that AstraZeneca can live up to? It speaks volumes that the company shares fell by 11% after its rejection of the Pfizer deal; this numerically cut the value of the company to around £54bn, ironically a whole £15bn less than Pfizer was willing to offer to acquire the firm and importantly £3.85 less per share than AstraZeneca wanted to begin negotiations. This has potentially been the single biggest case of value destruction on behalf of shareholders of AstraZeneca. In contrast, Pfizer’s shares rallied by 0.55% in trading yesterday.
In companies listed on the FTSE 100 most shareholders are a combination of Wealth, Investment and Fund Management Companies. With a unified voice these companies can hold a strong and decisive influence over the direction of any given firm. Unfortunately, the shareholders of AstraZeneca were not in agreement as to the possibilities of the deal, it was a 3/2 split. Shareholders like Woodford Investment Management, Aberdeen Asset Management and Threadneedle all wanted to reject the deal, namely on the basis that it was motivated by tax avoidance and cuts to research jobs. This mirrored AstraZeneca’s sentiments against Pfizer’s plans to switch the combined firms tax base to the UK, as well as their admission in parliamentary hearings that there would be job cuts and a reduction in the combined companies’ research and development spending.
In direct opposition, firms such as Axa Investments and Jupiter Fund Management expressed frustration at AstraZeneca’s handling of the deal. Richard Marwood, a senior investment manager at Axa, which holds a 4.6% stake in AstraZeneca, said he was ‘very disappointed’ and rejecting the deal ‘was not necessarily acting in shareholders’ best interest’. Some even stated that the personality clashes between the companies’ bosses had ‘triumphed over shareholder-value creation’. With the importance of Pascal Soirot’s claims made to both MP’s during questioning, and undoubtedly to investors in secret, it will be of no surprise that companies like Axa and Jupiter will now become even more active to force the board to materialise these promises. The main pledge being that the firm will increase revenues by 75% over the next decade.
Under City Takeover Rules (UK Takeover Panel), there is a chance, that some institutional shareholders might be able to sway the ‘no’ voters in order to reverse the decision of the board. Still, unless they put something into action soon (26 May 2014 is the current cut off date), the deal will be off the table for the next 6 months at least. Furthermore, it was reported by a source close to Pfizer on Monday, that it would be amazed if AstraZeneca’s shareholders put enough pressure on the company’s board to force it to reconsider the offer.
However underhand some commentators have made of AstraZeneca’s tactics, which will go down in history, one might offer a round of applause for a company defending itself against such a powerhouse that is Pfizer, aptly named the ‘praying mantis’ that ‘sucks the lifeblood out of their prey’. But, this failed deal seems bitter sweet against the backdrop of extremely aggravated investors who saw an opportunity for a very lucrative deal just pass them by. Whilst Pfizer’s shares rallied yesterday, the same sentiment must be felt by them too. It seems as though everyone has lost out in this deal, which had the potential to be mutually beneficial to all parties.
Conclusion
Only time will tell if AstraZeneca is really worth £58.85 per share, and whether it can make good on its claims to investors. Or, in the alternative, that we find the company’s hopes dashed and brought down by a troubled and difficult environment for pharmaceutical giants.
Maybe the biggest loser here is political. Protectionism is once again the mainstream view, considering AstraZeneca’s title of being a ‘British champion’ destined for an export-rich renaissance. Such sentiments were made by Vince Cable who stated that ‘we have made it very clear that what we’re out to protect is the national interest in research and development, manufacturing, and jobs’. In a more extreme view, Chuka Umunna, the shadow business secretary, stated that the rejection was welcomed, adding that Labour, if they won the next election, would block the deal. He added that ‘Labour was standing up for British jobs and British Science’. Unfortunately, future high-profile foreign takeover bids could easily run into even greater political resistance if protectionism keeps winning the political war on a populist ticket.