Merging Pfizer and Allergan
Introduction
On the 21st of November 2015, pharmaceutical giants Pfizer and Allergan confirmed the merger that created the largest drug company by sales. Pfizer is a pharmaceutical company situated in New York City and Allergan is situated in Dublin. The merged company will have a value of $160 billion. For every share Pfizer shareholders own, they will get one share in the merged company, and Allergan shareholders will receive 11.3 shares for every Allergan share. Also, Pfizer agreed to pay a premium of $35 billion. But why would Pfizer agree to these terms? Why would Allergan? Is the merger more beneficial to Pfizer, Allergan, or both? Ultimately, these questions lead to one fundamental question: How is this merger beneficial to the companies themselves, as well as merged?
In order to answer these questions, the advantages and disadvantages of a merger in general will be summarised. Next, the benefits and pitfalls of the Pfizer Allergan merger will be determined. The benefits will be determined by applying Porter's five forces model to the case, and by looking at the main advantages of the merger for both Pfizer and Allergan. The pitfalls will be determined by looking at the main disadvantages of the merger, as well as using Hofstede's cultural model to define possible cultural differences.
Advantages and disadvantages of a merger
Merging brings both advantages and disadvantages. Some important advantages are tax inversion, increased market shares in both countries, and an enhancement in the R&D programmes of the companies.
Firstly, tax inversion is an advantage. Some countries have a lower corporate tax than other countries. If two companies in different countries merge, one of the companies can reincorporate to the country of the other company, in order to benefit from the more favourable corporate tax rate in that country. This is called tax inversion.
Secondly, a merger will result in an increased market share in both countries. The two companies have their own market share in their own countries, but when they merge, both market shares will be in the new company's hands, increased both companies' presence in the global market.
Lastly, merging will enhance the new company's R&D programmes. This is very important for a pharmaceutical company, seeing as their R&D improves modern medicine, which saves lives. The combined assets make it possible for the new company to invest more in R&D, and put their best scientists on their programmes. If successful, better R&D programmes will increase revenues as well.
However, there are some disadvantages connected to a merger. Examples are a clash of cultures, dis-synergies, and layoffs.
A clash of cultures can cause serious problems for the merging companies. Two companies with different cultures need to adjust themselves to each other; otherwise it is nearly impossible for them to be able to work together. (Trompenaars, Hampden-Turner, 1997)
In 'Where mergers go wrong', Christofferson et al. (2004) wrote: 'For starters, executives should cast a gimlet eye over estimates of top-line synergies, which we often found to be inflated. They should also try to anticipate common 'dis-synergies' (such as the loss of customers and difficulties reconciling different service terms) and consider raising their estimates of onetime costs.' These dis-synergies cannot be neglected. He also mentions that this loss of customers for the average merging company is, in their experience, about 2%-5% of the combined customer of the companies.
Another disadvantage is the layoffs that often come with mergers. Because two companies merge, some employees will be fulfilling the same functions. Therefore, the merged company will have to let go a certain amount of employees.
Benefits of the merger
Tax inversion
In the Harvard Business Review, Gomes-Casseres wrote that Pfizer is reportedly willing to pay a total premium of about $35 billion to make the merger happen. Many reports claim that the main reason for the merger is tax inversion. Smith and Groden (2015) wrote: 'An inversion occurs when a US company merges with a foreign company and reincorporates overseas in order to avoid American corporate taxes.' In this case, Pfizer takes advantage of Allergan's location, namely Ireland, to avoid American corporate taxes. The New Yorker reports that Pfizer will pay a corporate tax of 12.5% in Ireland, which is very low compared to the 35% they pay now in the US. Also, according to the Washington Post, Pfizer has $70 billion of profit held offshore to avoid paying US income tax on it. So, once the merger is complete, they will be able to get their hands on that $70 billion, making the premium worth paying for.
Five Forces of Porter
Threat of new entrants is low. Both Pfizer and Allergan are giants in the pharmaceutical industry. Daily Mail mentions that Pfizer already is the world's second-biggest drugmaker by revenue. Once they merge, they will be number one in the world. Moreover, entering the pharmaceutical industry is tough, because there are a lot of patents in that industry.
Threat of substitutes is medium. Once patents expire, generic branded drugs become a threat.
Bargaining power of buyers is medium. During the time a patent is active, Pfizer Allergan can dictate its own prices. However, once that patent expires, other companies can produce the medicine, which gives customers the opportunity to buy their medicine elsewhere.
Bargaining power of suppliers is low. Most drugs, because they are patented, are produced in-house. The suppliers often only supply the technology needed to produce the medicine.
Intensity of rivalry is high. In the pharmaceutical industry, many competitors strive to create better products for their customers. Although Pfizer Allergan would be the biggest drugmaker by revenue, there are a lot of pharmaceutical companies looking to improve certain types of drugs, because of the chance to gain a lot of revenue when one creates or improves a new type of drug.
Pitfalls of the merger
Layoffs
One pitfall of the merger could be layoffs. Pfizer and Allergan's merger means that they will have to reduce the number of staff performing the same duties. The merger is huge, so there is a good chance they will have to lay off a considerable amount of staff. This is cost-saving for the new company, but it may affect the employees negatively. Employees could get afraid of losing their jobs for instance, causing their productivity and motivation to decrease.
Culture
A different pitfall could be a culture problem. According to Hofstede (2010), both the Americans and the Irish have a very low score on long term orientation. Cultures that score low on long term orientation tend to 'exhibit great respect for traditions, a relatively small propensity to save for the future, and a focus on achieving quick results.' (Hofstede, 2010) In order for a merger to work, both companies will have to accept each other's tradition, and cultivate a relationship. They will have to work together to make the merger work in the long term.
Conclusion
In conclusion, merging has major benefits for both Pfizer and Allergan. Allergan shareholders will receive a considerable premium, and Pfizer will be able to use the better tax rate in Ireland. Once merged, the Five Forces of Porter will be better for both companies when they have merged.
Compared to the benefits for the merger, the pitfalls are not major concerns. Although the layoffs might decrease productivity for a bit, after the layoffs productivity will be restored. Apart from the low long term orientation in both countries, which may or may not cause problems, American and Irish people are very similar. Only time will tell whether or not they will be able to work together in the long term.'