Commenting on the newly announced merger between Pfizer and Allergan, John Colley, Professor of Practice at Warwick Business School and an expert on large-scale mergers, has made the following statements.
“Botox producer Allergan has been acquired for $160 billion by Pfizer to make it the world’s largest pharmaceutical business. This deal follows a pattern in which the pharmaceutical industry has seen acquisitions totalling more than $600 billion this year as the industry consolidates. Industry valuations increase as industry players become concerned at being left behind in the race for scale. In the instance of Pfizer, it is also pursuing greater growth as its own established products are losing patent protection at a greater rate than it can produce innovative products.”
He continued: “Allergan’s drug portfolio has greater potential for growth. In addition, the lure of tax advantages from a Dublin Head Office has been a significant factor in driving this deal. The threat of succumbing to US tax rates has meant that Pfizer has been desperate for a deal outside the US. The failure of the AstraZeneca bid in a consolidating industry has driven the substantial price paid for Allergan.”
“In a year in which low interest rates, relatively benign markets, reasonable growth prospects and institutions awash with cash, there is likely to be a record number of deals exceeding the previous record of $4.6 trillion in 2007.”
“Most deals this year have been consolidations within an industry that have a clear strategic logic and, as a consequence, slightly lower risk. AB InBev and SAB Miller, Dell and EMC, Holcim and Lafarge are designed to exploit greater market power through size and generate substantial cost savings through scale and scope economies. Head Office and Regional management are generally key targets.”
“Both institutions and businesses draw confidence from ‘strength in numbers,’ which encourages more deals. Despite the enormous risks associated with acquisitions in which more than half destroy value and 60–80% materially fail to deliver expected benefits, the rush goes on,” he added, concluding: “Research shows that the biggest reason for acquisitions failing to deliver benefits is simply paying too much! One wonders how many of the 2015 deals will ultimately fail to deliver value. My money is on more than half.”