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DemonDoug (99.87)

Did Pfizer Just Commit Suicide?

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29

January 26, 2009 – Comments (18) | RELATED TICKERS: PFE

As someone with a real value investing outlook in terms of my overall strategy, I have kept up with Pfizer for a number of years, mostly just watching.  The dividend always intrigued me, but for the most part I have been bearish, because I don't like their business model and they have significant pipeline issues.  I felt they were the worst investment of all the big pharmas, you'd be better off going with MRK, GSK, and especially JNJ.

But this deal today, it just stinks.  I still won't red thumb it in caps, because it's such a slow mover, and I could still be wrong, but holy heck, buying Wyeth for $68B?  What on earth is the CEO, the board of directors, and all of management thinking?  This will dilute shareholders big time, PFE is taking on an additional $22.5B in debt (in this economy? are you crazy?), and moreover, this does absolutely nothing to improve the long-term viability of the company.  Wyeth doesn't have a great pipeline, blockbuster drugs are coming off-patent, this will also tie up capital if a biotech strikes it big and would have been an acquisition partner...

The whole thing just doesn't make any sense.  I guess a lot of things in the investing world don't make sense, but there is only one word I can think of for this transaction:

Boondoggle.

I know Pfizer isn't exactly a "du jour" topic or particularly exciting in any way, in fact it doesn't get much more boring than this kind of thing, but PFE is a Dow component, and I'm seriously thinking that this transaction could destroy the company.

Thoughts?

18 Comments – Post Your Own

#1) On January 26, 2009 at 3:49 PM, anchak (99.74) wrote:

Tells you about their pipeline risk doesn't it?

I think they want to go the generic way - Wyeth's more of a player there.

It would be a quagmire

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#2) On January 26, 2009 at 3:51 PM, SnoopyDancing (< 20) wrote:

Do the directors get something extra out of doing a deal like this? An extra lining for each golden parachute? It would be easy to do a big deal and leave the company, taking a big paycheck to the bank and leaving many behind to pick up the pieces. EEE is a perfect example of selling out and leaving.

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#3) On January 26, 2009 at 4:08 PM, Tastylunch (99.59) wrote:

Oh no, this does look very  bad.Their piplien must be worse than people think if they are this desperate.  I'll have to dump my old man's shares before it super tanks.

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#4) On January 26, 2009 at 4:35 PM, TMFinept (69.76) wrote:

On the one hand it does look quite bad, but with a little further investigation it's actually quite an interesting potential deal.

1. The deal will leave plenty of cash of Pfizer's balance sheet and a manageable debt load. When everything's accounted for, I think the really unsavory effect will be in an enlarged chunk of PFE's assets being goodwill - something I hate to see.

2. Wyeth's consumer healthcare products could concievably be sold off at a later date in much the same way as Pfizer fairly recently sold off its own. There are a lot of valuable brands there.

3. The combined revenues will prevent Pfizer's earnings from dropping off a cliff. Wyeth's revenue is better spread amongst its products whereas Pfizer's is heavily skewed to one.

4. Wyeth brings whole new revenue streams and fields of research to Pfizer.

5. Wyeth's pipeline is actually pretty interesting.

Personally, as a shareholder I'm none too happy with the acquisition. I see that there are some intersting benefits but I find it hard to believe that the companies will achieve all of the synergies they're hoping for. Fact is we all know that most of those claims prove to be pipe dreams. What usually happens is a big, bloated pig of a deal that results in a writedown of goodwill a few years down the road.

My preference would have been for Pfizer to acquire smaller, niche companies for their pipelines at low cost. Easy to integrate and/or separate wheat from chaff. Seems like Pfizer spent a lot of money simply to produce earnings continuity after Lipitor is off-patent.

There are a lot of potential pitfalls in this deal and I don't like it all that much either, but it's not all bad. Worth further investigation.

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#5) On January 26, 2009 at 4:46 PM, ahobbs (57.30) wrote:

I haven't seen anyone talk about the dividend cut to boot.  The yield has dropped from around 7.5% ($1.28 annual / share) to 4% ($0.64 annual / share).  Given the current climate I'm not surprised, but ouch!

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#6) On January 26, 2009 at 5:02 PM, QualityPicks (95.28) wrote:

I believe Pfizer is just trying to get too big to be let to fail by the government :) They are also probably encouraging everybody to leverage up on CDS for their company :)

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#7) On January 26, 2009 at 5:20 PM, Schmacko (96.47) wrote:

I'm thinking the dividend cut is a big part of the reason for the 10% drop today.  They're also talking about issuing new bonds to help fund the deal and since the credit ratings agencies are all talking about cutting PFEs rating that debt issue will come with a higher interest rate.  I'm glad I didn't end up buying PFE shares.

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#8) On January 26, 2009 at 5:59 PM, rebelcow (< 20) wrote:

The govt. doesn't care if a pharma company fails.

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#9) On January 26, 2009 at 7:53 PM, DemonDoug (99.87) wrote:

Inept, great comment.  I wish we could rate comments within blogs, I'd give you a rec for that one.  I can't say I see anything positive in this deal though.  I also can't agree that Wyeth has an interesting pipeline.  I think they have some interesting ideas with their pipeline, and that big pharma should move in that direction (more closer to biotech type research), but on an individual basis, I don't think their pipeline is anywhere near that of Genentech or Amgen or even Merck.

My preference would have been for Pfizer to acquire smaller, niche companies for their pipelines at low cost. Easy to integrate and/or separate wheat from chaff. Seems like Pfizer spent a lot of money simply to produce earnings continuity after Lipitor is off-patent.

This is exactly my thought too.  Combine that with the fact that financially, this is one helluva expensive deal that will really hamper their balance sheet in near, medium, and long term, it just seems like a real loser of a deal to me.  I just don't see the benefit of this merger for Pfizer at this time.

Tasty: You should have dumped those shares years ago.  Pfizer has been having big-time management issues for quite some time now.  They were already too big for their own good, this will make them even more bloated.

Their current share price is about where they were in 1998.  Ouch.

Snoopy: That's a great point.  You have to wonder about a deal like this.  One last hurrah for the M&A crowd?  Crazier things have happened...

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#10) On January 26, 2009 at 9:42 PM, TheGarcipian (99.24) wrote:

Son of a Viagra-inflated Zoloft-ingesting Xanax-popping Celebrex-consuming bum!  This is definitely a turn for the worse. I started my investing career out with DRIPs (and PFE was one of my first) and being a LTBH-type investor, but now I'm beginning to wonder who the sucker is in the room, and I can't spot him. Must be me then!

WTH, ya think if you'd held a big pharma company for 8 years, you'd have something better than a -50% return. Flush!   Time for me to cash in what's left of my PFE holdings.

Damn, now I need some Xanax...

--Gar

(Demon, a slight correction: it's Feb. 1997.)

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#11) On January 26, 2009 at 10:17 PM, Ayax2006 (99.03) wrote:

I have to agree.  Even if analysts praise Wyeth's biotech business, and perhaps the protection (more stable cash flows) from the consumer franchise brands (Advil, Centrum, Robitussin), one has to ask how many of these "mega deals" have ended up creating value?  And I mean for regular shareholders not for other players who cash out big time upon closing the deal...

In the end, WYE faces patent expirations in the short term, just like PFE... These will translate into billions of lost cash flows and profits, big writedows...and it all smells like yet another failed meag deal. 

An interesting question for anyone behind approving this type of deals is why?  Or in other words, who really benefits from these transactions?  Do we have any answer to this question from the many examples of past mega failures that we have experienced over the last decade? 

The academic literature on the subject clearly shows that these mega deceptions underperform.  Some attribute it to CEOs over confidence, hmmm... I'd like to see someone just putting together hard numbers that show who has won (and continue to win) big time, and how they did it.  Otherwise, why do small investors keep suffering from these pipe dreams?  Is the market really that irrational?

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#12) On January 26, 2009 at 10:22 PM, Tastylunch (99.59) wrote:

Hey they aren't mine they are the old man's sit's not entirely my call, it's been hard to convince him to let them go since he's had them for I don't know how many decades. He's a LTBH kinda guy. :-)

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#13) On January 26, 2009 at 11:38 PM, viconquest (92.34) wrote:

On the bright side, the EPS on net income will significantly increase the next 3 years even considering shareholder dilution. If they fully realize their plans of cost savings/synergies by 2010 and keep the dividend around .64/sh, that along with the increased revenue should make them break even on this by 2016. Wyeth also has a promising Alzheimer's drug pipeline that has a decent chance of churning out a blockbuster. If that happens, then this could turn out to be a great deal for Pfizer. Also, don't discount what Pfizer has in its own pipeline --- $6 billion/year on research can't all go for naught.

Can't blame Pfizer for finally using some of that dragon's hoard on something instead of letting it collect dust. As Inept pointed out, they still will have plenty of cash to be flexible and make another acquisition.

A big concern is how quickly and successfully can Wyeth be integrated into this behemoth. Will company morale and productivity remain the same? This company will be so HUGE and I would not like to be Jeff Kindler for the next few years (actually, for what he's making, we can swap shoes anytime). 

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#14) On January 27, 2009 at 12:50 AM, uclayoda87 (30.61) wrote:

Pfizer and the rest of the big pharma have to deal with the high cost and risk of getting new drugs to market.
Lipitor has a big competitor in Crestor, which is a better drug. It also has to deal with the three generic statins which are fairly good.
Chantix works but it may have some side effects that trial lawyers may be advertising about in a few years.
So if few new drugs are coming out and the existing ones will go generic, Pfizer may have to make most of its future revenue from pet supply sales or become a supplier of generic drugs.

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#15) On January 27, 2009 at 9:18 AM, kennerblue (< 20) wrote:

It's not a merger.  It's not an acquisition.  It's more of a shotgun marriage.  By muddying the waters with this deal,  Pfizer's senior executives and directors are out to make their future failures less apparent. 

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#16) On January 27, 2009 at 10:02 AM, JakilaTheHun (99.93) wrote:

I don't really follow Pfizer enough to know how it affects their operations, but I always find it odd when giant companies buy other large companies on the theory that they'll ... well, I'm not sure what the theory is, really.  A big bulky goliath isn't likely to better shareholder returns.  It's almost as if they feel like they have to acquire other companies to prove their worth to the market ... or something.

It's a bad deal for shareholders normally.  If Pfizer shareholders wanted Wyeth, they could buy shares of it themselves.  As an investor, I typically will not invest in big, bulky companies with an incoherent direction.  I don't understand the appeal of that unless you're wanting to buy a stock that serves as a (cheaper form of a) mutual fund. 

If Pfizer really wanted to make an acquisition, it seems like they should've scoped out smaller players with intriguing pipelines. 

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#17) On January 27, 2009 at 4:44 PM, TheGarcipian (99.24) wrote:

Goodbye and good riddance. I sold my entire lot this morning. PFE has disappointed me for the last time...

My reason for not selling earlier was that this megalithic company had a huge stockpile of cash. Sure, their patents were expiring, but with that much dough on hand, I figured they'd be able to come up with something to replace those (and yes, even barring the protracted delays for clinical trials and FDA approval). Big companies usually stay big for that very reason: inertia.

But now, it appears my investment thesis has been proven wrong, in that Pfizer is saying to the world, "we can no longer innovate; we must accumulate". Like others have said above, big mergers rarely work (AOL and TimeWarner, anyone? gads, I'd wished I'd sold my AOL lot back then, even for a loss!). Big mergers are more about CEOs and their EGOs. The separate kinetics, cultures and synergies rarely merge when two behemoths mate in this awkward way. I'm not gonna look; it's too gross (on a number of levels). I'm outta there, several years too late, but outta there nonetheless.

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#18) On January 28, 2009 at 10:05 PM, mizims (48.45) wrote:

$68 BILLION??!! I really can't understand why in a downturn as massive as this one...though I'm sure someone out there is throwing thier kids college fund into this while yelling "It's a sure bet!" 

Does the Dow and Rohm and Hass deal ring any bells??

RUN FOR THE HILLS!!

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