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AstraZeneca and Pfizer merger definitely off

Pfizer have conceded defeat in their proposed offer for AstraZeneca (AZN). Ian Read, the Chief Executive of Pfizer, said it was a “missed opportunity” for both the UK and for AZN shareholders. He also said we could have had the worlds largest pharmaceutical company domiciled in the UK which would have been good for science and manufacturing in this country. He surely has a point there.

In addition he complained about the Takeover Panel rules as contributing to thwarting the deal, but surely this was more a symptom of his tactics proving defective. Is it wise to make a “full and final offer” which puts your target on the spot and leaves them little room for manoeuvre? In addition the offer was indicated as being subject to the consent of the AZN board from the start, an unnecessary handicap which gave them a very powerful negotiating position.

But the board of AZN are surely also to blame. This was a company that the market (and by implication the analysts who advise most investors) valued at £35 in January this year. An offer of £55 seems generous does it not?

Can AZN management really justify a higher figure than £55 for the company as an independent entity?  Bear in mind that Pfizer would have gained some tax advantages and other synergies from the merger that would have justified a higher valuation than that for AZN as an independent business. But Pfizer were never given the opportunity to fully evaluate the business because the AZN directors consistently rejected the offer out of hand as unworthy of consideration and hence no due diligence was allowed.

Major investors were from media reports in two minds about the offer. Some thought it was worth considering but others were doubtful and considered a higher price more appropriate or simply thought they would prefer the company to stay independent. The directors of AZN did not seem to spend a lot of time debating the matter though. When the final offer of £55 was made they did not appear to consult their major shareholders and it was apparently a short conversation only with Mr Read on the subject.

Surely it would have been wiser for the AZN board to allow the offer to be put to shareholders even if they had reservations about it? It is often the case that the directors of a company value it more than outsiders. This is from hubris or because they think they know more about the business and its prospects than others. But the market should be the decider because the wisdom of crowds is superior to the wisdom of a small clique. At least they should have consulted more widely.

Investors never did see a full defence document, so that independent analysts and investors could be given the opportunity to consider it in detail. All we got was huffing  and puffing from both sides.

In summary, investors have been poorly served by both parties in this battle. There is nothing substantially wrong with the Takeover Panel Rules which simply provide some clarity and discipline to the process.

Pfizer can come back in three months time (with AZN’s consent), or in six months with a contested bid. Let us hope they do the latter so we get more out into the open. Shareholders can then make up their own minds on whether they like the merger and the offer price or not.

Roger Lawson

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