Pfizerâs Acquisition of Wyeth On Monday, January 26, 2009,Pfizer (NYSE: PFE), the worldâs largest pharmaceuticals group,announced that over the weekend it had reached an agreement toacquire Wyeth (NYSE: WYE), one of the largest research-drivenpharmaceutical and health care products companies. The deal wouldbe the eighth-largest, M&A involving a US target, and the thirdlargest globally in the pharma industry. Pfizer had been underpressure to re-invent itself, in particular because patents onseveral of its blockbuster drugs, currently generating a largefraction of the revenue, were due to expire in the coming years,meaning that revenues from sales of those drugs were expected todrop dramatically. Analysts argued that buying Wyeth would helpPfizer diversify its revenue sources and thus soften the expectedblow to revenues and EPS from patent expiration. In addition,Wyethâs expertise in vaccines would allow Pfizer to expand rapidlyin biological medicines, a fast-growing, profitable niche in theindustry that Pfizer had had little presence in.
Finally, the merger would allow Pfizer to cut 15% of its globalworkforce, resulting in an expected reduction in operating coststotaling $4Bn over three years. Specifically, 50% of the costsavings would be realized by the end of year 1, 75% by the end ofyear 2, and 100% by the end of year 3. The deal would be financedwith 2/3 equity and 1/3 debt. Assume that the risk-free rate is1.67%, the market risk premium is 8.5% and the corporate tax rateis 34%.
Pfizer wyeth Share price on Jan 16, 2009 17.13 38.54 number of shares Bn 6.74 1.33 Total Debt ($Bn) 16.35 0 equity beta .61 .42 cost of debt % 3.15% 4.81%
(c) Assuming that synergies in the merger have the same risk asthat of Wyethâs cash flows, find the WACC and the unlevered cost ofcapital for the synergies. (d) What is the total value created inthis deal? (e) Is the value created in the deal (estimated in
(d)) higher or lower than that in an average merger? (f) What isthe maximum cash price that Pfizer can afford to pay for Wyeth?
(g) Suppose that the actual takeover price was $50.19 in cashper share of Wyeth. How does the premium offered to Wyethâsshareholders compare with that in a typical merger?
(h) When the deal was announced on Jan 26, 2009, Wyethâs shareprice fell from $43.43 to $43.09. Why?
(i) In reality, Pfizer offered to pay with a combination of cashand shares. Specifically, each Wyeth share would be exchanged for$33 in cash and 0.985 of Pfizer shares. On Jan 27, Pfizerâs shareprice was $15.49, and Wyethâs share price was $43.89. Were Wyethshares on that day worth more or less than the value of the offer?Why?
Pfizerâs Acquisition of Wyeth On Monday, January 26, 2009,Pfizer (NYSE: PFE), the worldâs largest pharmaceuticals group,announced that over the weekend it had reached an agreement toacquire Wyeth (NYSE: WYE), one of the largest research-drivenpharmaceutical and health care products companies. The deal wouldbe the eighth-largest, M&A involving a US target, and the thirdlargest globally in the pharma industry. Pfizer had been underpressure to re-invent itself, in particular because patents onseveral of its blockbuster drugs, currently generating a largefraction of the revenue, were due to expire in the coming years,meaning that revenues from sales of those drugs were expected todrop dramatically. Analysts argued that buying Wyeth would helpPfizer diversify its revenue sources and thus soften the expectedblow to revenues and EPS from patent expiration. In addition,Wyethâs expertise in vaccines would allow Pfizer to expand rapidlyin biological medicines, a fast-growing, profitable niche in theindustry that Pfizer had had little presence in.
Finally, the merger would allow Pfizer to cut 15% of its globalworkforce, resulting in an expected reduction in operating coststotaling $4Bn over three years. Specifically, 50% of the costsavings would be realized by the end of year 1, 75% by the end ofyear 2, and 100% by the end of year 3. The deal would be financedwith 2/3 equity and 1/3 debt. Assume that the risk-free rate is1.67%, the market risk premium is 8.5% and the corporate tax rateis 34%.
| Pfizer | wyeth | |
|---|---|---|
| Share price on Jan 16, 2009 | 17.13 | 38.54 |
| number of shares Bn | 6.74 | 1.33 |
| Total Debt ($Bn) | 16.35 | 0 |
| equity beta | .61 | .42 |
| cost of debt % | 3.15% | 4.81% |
(c) Assuming that synergies in the merger have the same risk asthat of Wyethâs cash flows, find the WACC and the unlevered cost ofcapital for the synergies. (d) What is the total value created inthis deal? (e) Is the value created in the deal (estimated in
(d)) higher or lower than that in an average merger? (f) What isthe maximum cash price that Pfizer can afford to pay for Wyeth?
(g) Suppose that the actual takeover price was $50.19 in cashper share of Wyeth. How does the premium offered to Wyethâsshareholders compare with that in a typical merger?
(h) When the deal was announced on Jan 26, 2009, Wyethâs shareprice fell from $43.43 to $43.09. Why?
(i) In reality, Pfizer offered to pay with a combination of cashand shares. Specifically, each Wyeth share would be exchanged for$33 in cash and 0.985 of Pfizer shares. On Jan 27, Pfizerâs shareprice was $15.49, and Wyethâs share price was $43.89. Were Wyethshares on that day worth more or less than the value of the offer?Why?
