Académique Documents
Professionnel Documents
Culture Documents
SUSHIN SURENDRAN
Mentor: Dr. Jaladi Santosh Rupa
ARU Student ID: 1564791
LSC Student ID : 0012FBNRRA0415
Contents
1) Introduction.................................................................................................................... 5
Ansoff Matrix.......................................................................................................... 16
F)
Porters Diamond.................................................................................................... 21
J)
Finance............................................................................................................................ 23
K) Valuation Models.................................................................................................... 23
L)
Research Methodology.................................................................................................... 25
A) Research Philosophy.............................................................................................. 25
B) Research Approach................................................................................................ 26
C) Data collection....................................................................................................... 26
D) Research Ethics...................................................................................................... 26
5) Problem Analysis and Solution Recommendation.........................................................26
A) PESTEL Analysis........................................................................................................ 26
B) SWOT Analysis........................................................................................................... 28
C) Porters Five Forces................................................................................................... 29
A) Threat from New Entrants...................................................................................... 29
B) Suppliers Bargaining Power.................................................................................... 29
C) Buyers Bargaining Power....................................................................................... 29
D) Rivalry of Competitors............................................................................................ 29
E) Threat of Substitutes.............................................................................................. 29
F)
G) BCG Matrix................................................................................................................ 30
A) Cash Cows.............................................................................................................. 30
B) Stars....................................................................................................................... 31
[2]
Integration Approaches............................................................................................. 32
A) Preservation........................................................................................................... 32
B) Absorption.............................................................................................................. 32
C) Symbiotic............................................................................................................... 33
D) Transformation....................................................................................................... 33
E) Holding................................................................................................................... 33
J)
Strategic Reasons...................................................................................................... 33
M)
Recommendations..................................................................................................... 39
7) Conclusion.................................................................................................................... 43
8) References.................................................................................................................... 44
9) Appendix...................................................................................................................... 47
Mind Map......................................................................................................................... 47
ARU Research Ethics Form............................................................................................... 48
[3]
1) Introduction
The Global pharmaceutical industry has been one of the most consistent performing industries. The
innovations happening in the industry has paved the way for the industry to grow at a consistent pace.
[4]
[5]
(Source: IMC)
Pfizer, one among the largest pharmaceutical companies globally, with its headquarters in New York
City, USA has always been a company that has grown through acquisitions. This strategy has helped
them to grow substantially to become the largest in 2013. The company has acquired various companies
like Warner-Lambert, Pharmacia and Wyeth throughout the years. The company has decided to follow
the same path when they decided to acquire the UK based pharmaceutical company AstraZeneca which
is the 6th largest globally and the second largest in the UK. Even though the attempt was made by Pfizer,
AstraZeneca completely rejected the offer made by Pfizer on multiple occasions.
As a strategic consultant, the author will try to prepare a report based on the case of the acquisition
attempt made by Pfizer to acquire AstraZeneca. This report will analyze the various reasons as to why
the acquisition attempt was made by Pfizer, by analyzing their internal and external environments along
with various other models that will provide an insight in to the company and come up with reasons.
[6]
2) Problem Statement
The decision made by Pfizer to go for acquiring AstraZeneca will create a huge impact in the industry as
the end result of the acquisition will be the largest pharmaceutical company. The acquisition would have
created potential benefits for Pfizer. The expiry of Pfizers patent of certain blockbuster drugs created a
dent in the position of Pfizer as this could have resulted in them losing competitive advantage, along
with its delay in research and development of new drugs was also disturbing Pfizer. According to
AstraZeneca the acquisition would have caused disruptions, which was a major reason for them to reject
the offer. The offer proposed by Pfizer was undervalued as per AstraZeneca which resulted in the
rejection of the offer. The offer by Pfizer also had too much of Pfizer stock that was a risk for the
shareholders of AstraZeneca. One of the drivers for Pfizer to go for the acquisition was to save costs,
and AstraZeneca believed this could well lead to delay in the development of drugs which was another
challenge for the acquisition. The proposal by labor party to amend anti-takeover regulation will have
potential impact on Pfizer if they decide to go with the deal after cool off time period.
Objectives
1) To critically analyze the drivers of Internationalization for Pfizer.
2) To critically analyze various modes of entry for Pfizer to enter in to the UK market.
3) To critically analyze the competitive profile of Pfizer and strategic reasons for them to acquire
AstraZeneca.
4) To critically analyze potential post acquisition integration approaches for Pfizer.
5) To critically examine AstraZenecas decision to reject the final offer of 50 per share from Pfizer.
6) To critically analyze the impact of proposed acquisition on the capital structure of Pfizer.
3) Case Brief
Harvard Business School case Pfizer and AstraZeneca: Marketing an Acquisition (A) written by John
A. Quelch and James Webber is the case that will be analyzed as a part of the Integrated case study
project. The case is on the backdrop of the acquisition proposal made by Pfizer to acquire AstraZeneca.
The case discuses various reasons why Pfizer wanted to acquire AstraZeneca as well as the challenges
that Pfizer faced and reasons of AstraZeneca for rejecting the offer. This section will give a brief
description of the case study.
The Pharmaceutical industry in the UK is the countrys major agents of research and innovation. The
industry spends about 4.2 Billion on R&D in 2012 (Monaghan, 2014). The health spending in the UK
accounted for 9.4% of the GDP. The industry also has a reputation of providing higher number of
employment opportunities as well as high pay as well. The industry employed 73,000 workers in the
year 2012. The trade balance in pharmaceuticals has been positive which means that the countrys
exports in pharmaceuticals were higher than its imports in pharmaceuticals. The trade balance figure
stood at $4.6 Billion in the year 2013. The Government has also stepped in big time to provide the
impetus to the industry by making various investments including helping universities and small sized
business to conduct research.
Pfizer
Pfizer became the top pharmaceutical company in the globe with revenue of $52 billion and Market
capitalization of $192 billion. Pfizer has been the pioneer in the development of blockbuster drugs like
Penicillin, Celebrex, EpiPen, Lipitor, Viagra and Zoloft. The company describes itself as a researchbased, global pharmaceutical company.
[8]
AstraZeneca
AstraZeneca is the second largest company in the UK pharmaceutical industry behind GlaxoSmithKline
and the sixth largest among the Global pharmaceutical industry players with revenue of $25.7 billion
and $89.5 billion market capitalization.
AstraZeneca also followed the same footsteps of Pfizer as far as the strategy of growing is considered.
AstraZeneca was also involved in various acquisitions, with the largest being the acquisition of
MedImmune in the year 2007 for $16 Billion. The current CEO of the company Pascal Soriot has been
seen to be someone who is in to future, as after becoming the CEO he has made decisions that will be
instrumental in the growth of the company.
Proposed Merger
Ian Read, CEO of Pfizer contacted Leif Johansson privately on November 25, 2013 to talk about the
possibility of an acquisition. On January 5, 2014, an offer of 46.61 per share was offered to
AstraZeneca, but they rejected stating the offer undervalued their pipeline and the offer did not include
enough cash. Pfizer went public with their interest on 28th April, 2014, when they announced their
interest in AstraZeneca publicly, that resulted in an increase in the stock price of both companies. Pfizer
made their last offer of 50 per share on 2nd May, 2014, which was also rejected by AstraZeneca. The
rationale for the acquisition was criticized by many.
The Government was initially in favour of the deal, but later showed skepticism over the deal as the deal
would have had negative impact on jobs and the sector. Labour Party, the opposition party was also
against the deal as they felt the deal was meant for saving their tax by changing their domicile and also
the commitment made by Pfizer was pretty weak and paper thin.
The main criticism of the attempt was that the main driver for Pfizer to acquire AstraZeneca was to save
on taxes by moving their domicile in to the UK from the US. Even though Ian Read maintained that this
was not their main motivator, many were not ready to believe that. According to various editorials
[9]
Strategic Management
International Business
Finance
Strategic Management
The decision to acquire a firm from part of a company is in itself a part of the discipline of strategic
management. The given case also has certain problems that can be categorized in to Strategic
management discipline.
Pfizer in the recent times faced difficulty in maintain their competitive advantage mainly due to the
expiry of their particular patented blockbuster drugs along with the delay in the research and
development of new drugs from part of the company. Thus, Pfizer will have to understand their present
competitive position to make strategies to hold on to their competitive position in the industry and
probably this was one of the reasons for them to go for the acquisition as well. AstraZeneca, the target
company said that the acquisition would have led to disruptions which were one of the reasons for them
to reject the offer. Pfizer should make decision on their post acquisition integration approach to
overcome the potential disruptions of the acquisition.
International Business
[10]
A plan of the case study analysis including various models that will be covered under different
disciplines is in the figure below:
[11]
Situation Analysis
SWOT
PESTEL
Porter's Five
forces
Strategic Management
Competitive
Profile Matrix
BCG Matrix
Ansoff Matrix
Post Acquisition
Integration
Approach
International Business
Yip's Globalisation Drivers
Porter's Diamond
Finance
A) PESTEL ANALYSIS
PESTEL analysis is one of the most extensively used tool by companies to gain an understanding of the
exterior environment of a business. The framework mainly covers six different factors that will have
potential impact on the business and the six factors are political, economical, social, technological,
environmental and legal factors (Neild and Carysforth, 2004).
[12]
Political
Legal
Economical
PESTEL
Social/
Cultural
Environmental
Technological
B) SWOT Analysis
SWOT, one of the most significant tools made use of by organizations to analyze both their internal as
well as external environments. There are four factors that are being considered during SWOT analysis
which are strengths, weaknesses, opportunities and threats, out of which the first two are internal to the
organization and the latter two, are external to the organization (Office and Webster, 2010).
Strengths
Threats
SWOT
Weakenesses
Opportunities
Strengths: Office and Webster (2010) argues that strengths are the positive elements that are internal to
the company. Strengths of a company can be tangible as well as intangible, brand image can be
[14]
Strategic Management
C)
Michael E Porter from Harvard University, in the year 1979 introduced a business model that looked at
the competition level happening in an industry which also helps in formulating strategies that outclass
the competitors. The model aids the companies in looking at the attractiveness of an industry, which
would help them in making decisions on whether to enter that particular industry or not (Botten, 2009).
The model introduced by Porter, considers five forces that will have an impact on the industry. Those
five forces are illustrated below:
[15]
Competitive Rivalry
Threat of New
Entrants
Threat of Substitutes
Porter's
Five Forces
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
[16]
E)
Ansoff Matrix
H. Igor Ansoff, the father of strategic management, in 1957 in the Harvard Business Review, came out
with a model that portrays different corporate growth strategies for an organization. Since then the
model has been widely used by organizations to devise strategies for growth (Proctor, 2000).
Ansoff matrix considers four alternative strategies for growth, that an organization can make use of. The
matrix focuses on the two dimensions of products and markets. The matrix also aids the organization in
understanding various risks that are associated with the strategies as well (Proctor, 2000). The four
different strategies are illustrated below:
[17]
MARKETS
Existing
New
Market Penetration
Product Development
Diversification
Existing
Market
Development
Ansoff matrix aids the organization in designing strategies for the organization to grow. The growth
strategies in the matrix are on the combination of Product-Market. When a company moves from one
quadrant to another quadrant either vertically or horizontally, the level of risk associated also increases.
The risks that are associated with each strategy can be analyzed and the organization will be able to
choose the one that matches with their risk taking culture.
F)
In the early 1970s, a model was developed by Bruce Henderson of Boston Consulting Group intended to
help in the planning of different portfolios of an organization. The matrix has got two determinants,
market share and market growth. Market share is a depiction of competitive advantage while market
growth is a depiction of industry attractiveness (Proctor, 2000). The matrix divides business units in to
four different quadrants on the basis of the above mentioned two determinants.
The matrix assumes that the result of increase in market share will be increased cash generation and
increase in market growth is increase in usage of cash. Thus the position of a business unit of an
organization indicates its cash generation and cash usage (Proctor, 2000). The four quadrants are
illustrated below:
[18]
Stars
Question Mark
Cash Cows
Dogs
HIGH
HIGH
LOW
[19]
Preservation
Holding
Symbiotic
Integration
Approach
Absorption
Transformation
[20]
International Business
H) Yips Globalization Drivers
George S. Yip in 1992 introduced a framework that looked at the globalization potential of an industry
known as Yips Globalization Drivers. The framework then onwards has been one of the most widely
used frameworks in looking at the attractiveness of an industry in the context of globalization potential.
Yip argued that not all industries have the same globalization potential and they attract more global
players compared to other industries (Stonehouse and Houston, 2003). The drivers of globalization can
be categorized in to four different categories and they are illustrated below:
Cost
Competition
Yip's
Globalisation
Drivers
Market
Government
I)
Porters Diamond
Michael E. Porter introduced a new economic model in his book The Competitive Advantage of
Nations called the Diamond model which aids in understanding the competitive position of a nation in
the global scenario. Michael Porter argued that a nation can have competitive advantage over the nations
(Stonehouse and Houston, 2003). He introduced four factors that are considered to provide the nation
with a competitive advantage and they are illustrated below:
Demand Conditions
Factor Conditions
J)
In the present world of Globalization, it is imperative that an organization aiming for growth goes
international. Most of the high selling and successful organizations have their footprints in various parts
of the world. This not only helps the organization to grow in size but also helps in spreading the risk.
There are various reasons for a company to go global like not enough demand in their home country,
increase in production costs or government policies (John and Gillies, 1996). According to John and
Gillies (1996), the most crucial decision that the organization needs to make is the selection of the mode
of entry in to the market. The apt mode of entry will depend on the organization and the environment of
the market they are aiming to enter.
There are various modes of entry and they are illustrated below:
Acquisition
Contract
Manufacturing
Greenfield
Investment
Modes of
Entry
Wholly
Owned
Subsidiary
Exporting
Management
Contract
Licensing
Foreign
Direct
Investment
[23]
Finance
K)
Valuation Models
The value of an organization is always something that has been keenly watched by the outside world
especially in the case of big organizations. The topic of an organizations value comes in to discussion
especially when another organization is looking for a merger or acquisition. It is important to know the
right value of an organization especially in the case of acquisition because if the correct value is not
found out then the offer could either be undervalued or overvalued and both are not good for the deal
(Kruschwitz and Loffler, 2006).
There are various valuation models to find out the value of an organization and one of the main
valuation models is in the illustration below:
Valuation Model
Discounted Cash Flow Method
DCF method of valuation is quite widely used model to find out how much an organization is worth.
The main and primary idea behind this model is that the worth of an organizations stock is the present
value of all the estimated cash flows in future. According to the model the greatest impact on share
valuation is caused by the changes in the long-term growth rates (Kruschwitz and Loffler, 2006).
L)
According to Agarwal (2013), Capital Structure of an organization is something that needs to be looked
at closely as analysis of capital structure will provide a clear indication of the financial health of an
organization. Capital structure simply put is the debt-equity relationship. Capital structure decision
mainly is the decision making of what source of finance should be used for a particular investment.
There are various kinds of sources of finance like equity, debt, and retained earnings (Agarwal, 2013).
Certain factors have huge influence on an organizations capital structure decisions and they are
illustrated below:
Business Risk
Market
Conditions
Organization's
Tax Exposure
Factors
Financial
Flexibility
Growth Rate
Management
Style
[25]
Research Methodology
According to Stake (2013), case study analysis is a method in which the study of a case is done by
making use of data that are available and come up with best solution to the issues. Secondary data is
only considered in the analysis and no primary data is collected.
A)
Research Philosophy
According to Novikov and Novikov (2013), research philosophies are a guiding path for the researchers
on how to handle the research. There are mainly two leading research philosophies, Positivism and
Interpretivism.
[26]
B)
Research Approach
The research approaches are mainly of two types, naming Deductive and Inductive approach. In
deductive approach, the research is done using existing studies and theories, but in inductive approach
new theories are built through either observation or experimentation (Novikov and Novikov, 2013).
In this case study analysis, deductive approach is made use of by the researcher.
C)
Data collection
D)
Research Ethics
Ethical issues arise in a research mainly when the data collection is primary data collection. Since there
is no primary data being made use of for the case study analysis, the chances of ethical issues dont
arise. Even though there are no ethical issues, there is an issue of plagiarism as the data used is
secondary. Harvard referencing style is used to give references when the work of another researcher is
used.
Political
[27]
Economic
Social
Technological
[28]
Environmental
Legal
B) SWOT Analysis
Strengths
Weaknesses
Opportunities
[29]
Threats
The industry of pharmaceuticals is one such industry in which for a new company to enter will require a
huge amount of investment. The huge capital required makes it difficult for fresh companies to get in to
the industry. Also the fact that most of the existing companies in the industry are there in the industry for
many years and are well established in the market, makes taking on them a huge challenge for a new
company. So, the threat of new entrants is low as far as Pfizer is concerned.
B)
The power for suppliers to bargain is low mainly because of the fact that there are many other suppliers
available from whom the companies can collect their materials, so if the supplier tries to bargain with
the company, then the company can move on to another supplier for the material. Another thing is that
the companies order for large quantities and as a result suppliers wouldnt be able bargain much with the
companies. So, the suppliers bargaining power is low as far as Pfizer is concerned.
C)
The companies in the pharmaceutical industries has got patent for their drugs and as a result the buyers
will not be able to put pressure on the companies to reduce the prices of the drugs as the buyers are left
with no other option other than to buy the drugs from the same manufacturer. So, the buyers bargaining
power is low as far as Pfizer is concerned.
D)
Rivalry of Competitors
Pharmaceutical industry is one industry with high level of competition happening, with many big
players trying to achieve competitive advantage over one another using various techniques like cost
reduction. The rivalry of competitors is high as far as Pfizer is concerned.
E)
Threat of Substitutes
The threat of substitutes is generally high especially in the generic medicines because of the cost related
advantages that one organization has over another company and also the present culture of people
[30]
F)
Novartis
Teva
Weightage
Rating
Score
Rating
Score
Ratin
g
Score
Innovation
0.15
0.45
0.60
0.30
HR Management
0.10
0.20
0.40
0.30
Asset Utilization
0.05
0.15
0.15
0.20
Leadership
0.15
0.45
0.45
0.30
Financial Strength
0.10
0.30
0.40
0.20
Product Satisfaction
0.10
0.40
0.40
0.30
Resource Management
0.10
0.30
0.30
0.20
Quality Management
0.15
0.45
0.60
0.60
Long-term Investments
0.10
0.20
0.20
0.20
Total
2.90
3.50
2.60
The Competitive Profile Matrix analysis indicates that Pfizer lags behind Novartis in various critical
factors especially in HR management and Quality management. On total Novartis scored 3.50 while
Pfizer scored 2.90 and Teva was only able to score 2.60. This indicates that Pfizer will have to make
improvements in order to stay competitive in the industry, especially improvements in factors where
they are behind like HR management and Long-term investments.
[31]
G)
BCG Matrix
A)
Cash Cows
Cash Cows is the first quadrant of the BCG matrix that will be looked at, cash cows are those products
that has got high market share with low market growth rate. Pfizer has got few products that could come
up in this quadrant. Prevnar 13, a vaccine developed by Pfizer is the first one that belongs to cash cows;
they were the first vaccine which could prevent 13 pneumococcal strains (Lorenzetti, 2015). This
vaccine generated revenue of $4.2 Billion in the year 2012 (Lorenzetti, 2015). Enbrel, which cures
rheumatoid arthritis, is the second one that can be considered as a cash cow. The promotion agreement
between Pfizer and Amgen got expired in 2012 and as a result Pfizer will only be receiving royalty for
2.5 years, even though they still produce huge revenue with low growth rate, so it can be considered as
cash cow (Lorenzetti, 2015).
B)
Stars
Stars are the second quadrant, and the products in this quadrant have got high market share as well as
high growth rate. Lyrica, Inylta, Xalkori have generated $397 Million dollars in revenue for Pfizer in
2012, these three can be considered as stars for Pfizer (Roland, 2015). These three are developed to treat
different health issues, so it is likely that they will generate high revenue in the future as well. Since
there is no surety that all the products that pass through FDA approvals will become a star for them, the
company should continue to acquire patents as well as improve R&D to improve the chances of making
products a star. Sutent is another product that falls under stars; the medicine is for the treatment of renal
cell carcinoma and other tumors (Reingold, 2014). The patent will expire by 2018, but still with the high
revenue that they generate they can be considered as star.
C)
Question Mark
Question mark is the third quadrant in which there is a high market growth rate but low market share.
These are the products that generally have the capability to become stars. As far as Pfizer is concerned
items belonging to their consumer product portfolio falls in to this (Reingold, 2014). Nexium OTC and
Centrum are two of those that fit in to this quadrant. Even they did well for Pfizer; there is still an
amount of uncertainty about their future (Ronald, 2015).
D)
Dogs
Dogs is the fourth quadrant in the matrix, these are products that has got low growth rate and low market
share. Lipitor is one such product which even though still produces revenue of $2Billion falls in to this
category as their sales shown a steep decline of 41% in 2013 compared to 2012 (Lorenzetti,2015).
Detrol and Detrol LA, are another products that comes under this quadrant, these products have lost their
exclusivity which resulted in a steep decline in their revenues. The patent for Viagra is going to expire
soon and even though they generated high revenue for many years. The end of exclusivity has made
Viagra a less attractive one for Pfizer and also the release of new drugs like Cialis has lowered their
potential to generate revenue as well (Reingold, 2014).
H)
Ansoff Matrix
In this part the changes that have happened to the portfolio of the Pfizer ending 2013 will be discussed
in the illustration below:
[32]
MARKETS
Existing
New
Market Penetration
Product Development
Wyeth acquisition.
Ferrosan, FoldRx and
AstraZeneca and
King acquisition.
Alacer Corporation
acquisition (Tirrell,
2014).
NextWave acquisition.
License agreements with
GlycoMimetics (Tirrell,
2014).
Market Development
Existing
Diversification
Indulging in licensing
Indian firms.
Acquired 40% stake in
community to promote
Brazilian based
trials.
recruitment in to clinical
Laboratorio Teuto
Brasileiro SA (Ward and
Massoudi, 2014).
These are the potential changes that has happened to Pfizer in the five years ending 2013 that is
applicable to the framework of Ansoff Matrix.
New
Pfizer through the acquisition will be able to get hold of new products like products related to oncology
as AstraZeneca is working on developing oncology drugs. This will belong to the Product Development
quadrant of the matrix. Pfizer will also get hold of various products which is also in the same range of
their products as both will cure the same diseases, and this will be part of the Market Penetration
quadrant of the matrix.
I) Integration Approaches
A)
Preservation
The first integration approach is integration by preservation. This approach is recommended in the case
of higher requirement for organizational autonomy and lower requirement for strategic interdependence.
In this approach the target organization is allowed to function on its own after the acquisition (Ellis and
Lamont, 2004). The level of change in both the organizations is low in this approach as a primary driver
of the acquisition is to keep the strategic capabilities of the target organization unimpaired. Providing
autonomy and decision making power to target organization is vital in this approach (Savovic, 2012).
[33]
B)
Absorption
The second among the integration approaches is the integration by absorption. This approach is
recommended when there is a higher need of strategic interdependence for both the organizations and
the lower need for organizational autonomy (Savovic, 2012). Consolidation of primary activities of the
both the organizations by incorporating the target organizations culture and operations is the primary
aim of this approach, as this approach demands a certain amount of change in the target organization. In
order to reduce the disruptions and ambiguity surrounding it, there is a necessity to move in a fast and
consistent manner (Savovic, 2012).
C)
Symbiotic
The third integration approach is symbiotic integration. According to Ellis and Lamont (2004), this
integration approach is made use of in situations when there is an equal need of strategic
interdependence and organizational autonomy. This approach in the initial stages involves a bit of
preservation approach and later the best practices in both the firms are incorporated. There will be a
certain level of change in both the organizations in this approach as the attempt is to incorporate the core
competencies and best practices of both organizations (Ellis and Lamont, 2004). There is a need to
coexist in this approach and as a result an environment should be created of cooperation between the
employees of both the organizations (Savovic, 2012).
D)
Transformation
The fourth integration approach is integration through transformation. According to Savovic (2012), in
this symbiotic approach there is a need for change in both the organizations and as a result of the
integration both the organizations got disassembled and the approach of integrating operations is known
as transformation approach (Savovic, 2012). In this approach there is a need of total reinvention from
the combined organizations, by creating a new organization with the chosen best practices and strategic
capabilities. New organizational structure, organizational culture and vision distinctly communicating
the strategic vision of the organization have to be developed (Savovic, 2012).
E)
Holding
The fifth among the integration approaches is integration through holding. In this approach the acquiring
organization acts as a holding to the target organization with no desire of integrating themselves with the
target organization (Ellis and Lamont, 2004). This approach is different from preservation approach as
there is no strategic need for being separate.
J) Strategic Reasons
Now, after conducting the analysis of various models including the drivers of Internationalisation from
International Business, the potential strategic reasons for the acquisition of AstraZeneca are noted
below:
Pfizer can save on their taxes, as the corporate tax in the UK is less compared to the US by
moving their domicile from US to UK.
Pfizer can make use of their cash held outside the US to make the acquisition, which if brought
to the US will be subjected to high taxes.
Pfizer had lost their patent exclusivity of some blockbuster drugs including Lipitor in the recent
past, so acquiring AstraZeneca will help them improve their product range.
[34]
AstraZeneca has been conducting extensive research in to developing their oncology pipeline;
acquiring AstraZeneca will help Pfizer to enter the market of cancer drugs.
The previous acquisition of Pfizer with Wyeth didnt create the shareholder values that they
would have liked and unfortunately can be considered as a failure, this along with the patent
expiration has affected Pfizer badly, so acquiring AstraZeneca was an option for them to make
the repairs.
From the analysis of Competitive Profile Matrix, Pfizer lagged behind Novartis on certain
critical success factors, acquiring AstraZeneca would help them in improving their competitive
position mainly due to the synergies.
Pfizer can achieve relevant cost synergies by removing functions that are overlapping; this would
help Pfizer in saving on costs.
The new policies introduced by the UK Government, is also reason that has attracted Pfizer to go
for acquiring AstraZeneca, as these policies are quite attractive and are quite good for the growth
of the UK pharmaceutical industry.
K)
The first framework that will be looked in to analyze the drivers for Pfizer to enter the UK is Yips
drivers of globalization framework. The two main drivers that has attracted Pfizer will only be discusses
in this part and they are cost and government drivers.
A)
Cost Drivers
The main accusation that Pfizer faced while they tried for the acquisition was that, the organization was
looking for tax savings because of the difference in corporate tax of US and UK (35% and 21%)
(Kollewe, 2014). The UK also provides credits on tax of 10% on profits obtainable to a new patent for
organizations to stimulate more investments in to research and development (Armitage, 2014). Pfizer
also had kept a good sum of cash outside the US and which can be made use of by them for the
acquisition of Pfizer and that would have helped them to avoid paying taxes for the fund if they had to
bring the fund to US (Kollewe, 2014). The potential synergy would have brought in high cost reduction
especially in R&D and operating costs, as relevant cost synergies can be achieved by removing
overlapping functions (Roland, 2014).
B)
Government Drivers
The UK government policies have always been a positive one for the pharmaceutical industries. About
82.5% of the total spending on health is spent by the government. In the year government made a life
science plan which will boost the sector. The trade policies of the UK are quite transparent (Landale,
2010). The present government under David Cameron has been quite open to new businesses coming in
to the UK and to attract new businesses the corporate tax got reduced to 21% in 2014 from 26% in 2011
and could further see a cut down of further 1% in 2015 (Armitage, 2014).
These are the drivers for Pfizer to go enter the UK as per Yips Drivers of Globalization framework.
L)
The second framework that will be analyzed is Porters diamond framework. The two factors that will be
looked at out of the four factors are Factor conditions and Related and Supporting industries.
[35]
A)
Factor Conditions
The first factor is the factor conditions. The UK pharmaceutical industry has always been of the crucial
employment provider in the UK and employed around 72,000 people in 2012 out of which 23,000 was
in research and development. The abundant availability of highly skilled workers is one such factor that
is important to provide competitive advantage. The infrastructure in the UK is of world class and the
government in the UK has always been cautious in building infrastructure that stands with best. The
government spent around $300 million in order to help universities and small and medium businesses to
conduct research which indicates that the knowledge bank is also quite strong, again another factor that
provides advantage (Ogunshakin, 2013). The spending on R&D crossed the mark $8 billion and which
indicates that the investment made on innovation is quite high and this will certainly add on to the
national advantage in the pharmaceutical industry.
B)
The UK pharmaceutical industry is an element of the cluster which also includes pharmaceutical
biotechnology and medical technology sector, which combined employs 175,000 people. The cluster
will have knowledge sharing happening that will help in the development of new technologies and
drugs. The UK government announced a plan in 2011, which will bring in the National Health Services,
the largest health care scheme in the UK, to play a vital part in the innovation of new drugs. NHS will
provide patient information from their database to the companies and which will help them in
developing new drugs and as well as the clinical trials will be conducted in NHS hospitals. This will
certainly give the country with a national advantage in the pharmaceutical industry.
These are the factors for Pfizer to enter the UK as per Porters Diamond framework.
M)
There are various modes through which an organization can enter another country. In this some of the
modes including acquisition will be discussed briefly.
1) Acquisition
The first possible mode is to acquire an existing organization. This is comparatively a quicker
way to establish in the market, since the organization has acquired one that has already been
there for sometime at least (John and Gillies, 1996).
2) Greenfield Investments
The second mode will be of Greenfield investment; this means that organization will start right
from the scratch in the new country by constructing operating facilities from the ground (John
and Gillies, 1996).
3) Licensing
The third one is licensing, in this the organization will have a contractual agreement with a
licensee, who will have the rights to sell or manufacture the organizations products or services
in that country (Ungson and Wong, 2009).
[36]
5) Management Contract
Management contract is another option for entering. In this mode the organization will enter in to
an agreement in which another organization will be allowed to run the organization completely
or in particular areas for a fee (John and Gillies, 1996).
6) Exporting
The sixth mode is Exporting and in this mode the organization will sell directly either product or
services to another organization in the targeted country. This is a good mode of entry if there is
less potential for sales in the market targeted (John and Gillies, 1996).
8) Contract Manufacturing
The last mode of entry is contract manufacturing, in this the organization gives contract to
another organization in the targeted country to make products based on their specifications.
When there is a higher risk of investing in the targeted country, this is a good approach to make
use of (John and Gillies, 1996).
These are the various modes of entry. As far as Pfizer is concerned contemplating other options to enter
the UK is important, since the opposition party has asked for an expansion in anti-takeover regulations
and if implemented Pfizer would not be able to acquire AstraZeneca after the cooling off period.
N)
The Financial Times has observed that the revenues of AstraZeneca will see a decline mainly because
the organization will lose their patent of certain drugs like Nexium, Crestor and Symbicort during the
period of 2014-2016. So, we are assuming the compounded annual growth rate to be -1% with stable
earnings before interest and tax margin. Using this and below mentioned assumptions the future free
cash flows will be forecasted.
Assumptions:
Current Assets/Sales- Same as 2013 value
Cash/Sales- Same as 2013 value
Depreciation and Amortization- Same as 2013 value
Current Liabilities/Sales- Same as 2013 value
Capital Expenditure- Same as 2013 value
Disposals/Purchases- Zero and constant
Terminal value- Replacement capital expenditure (Capital investments will be made use of to balance
the negative impacts of Depreciation and Amortization on the assets)
Forecasted free cash flows
[37]
2013
25,711
21%
5,399
20%
79%
2014
25,454
2015
25,199
2016
24,947
2017
24,698
2018
24,451
5,345
5,292
5,239
5,187
5,135
20,335
45%
9,217
11,118
20,132
19,930
19,731
19,534
19,338
9,125
11,007
9,034
10,897
8,943
10,788
8,854
10,680
8,765
10,573
16,051
1,788
14,263
15,890
1,788
14,102
15,732
1,788
13,944
15,574
1,788
13,786
15,419
1,788
13,631
15,264
1,788
13,476
4,583
49
4,583
49
4,583
48
4,583
48
4,583
47
4,583
673
673
673
673
673
4,583
(2,530)
5,699
0
8,137
0
8,095
0
8,053
0
8,011
0
4,060
62%
The discount rate that is WACC) will be calculated by finding the cost of equity by making use of
Capital Assets Pricing Model (CAPM). The cost of debt is described as interest expenses over overall
debt.
WACC Calculation
Risk Free Rate (Rf)
Equity Beta ()
3%
0.68
6.7%
21%
3.77%
4.77%
[38]
10.376
Data as if on 31/12/2013
74,339
Data as if on 31/12/2013
12%
88%
7.09%
The market value of the equity is addition of discounted free cash flows and discounted terminal value.
Future
free cash
flow
Discount
factor
Discounte
d future
free cash
flows
Growth to
perpetuity
Terminal
Value
Discounte
d terminal
value
Sum of
discounted
future free
cash flow
Total
Enterprise
Value
Overall
debt
Cash
Market
value of
2014
2015
2016
2017
2018
8,137
8,095
8,053
8,011
4,060
0.93
0.87
0.81
0.76
0.76
7,598
7,058
6,557
6,091
3%
99,224
75,437
27,303
102,740
10,376
9,217
101,581
[39]
As per the analysis done using DCF method, the market value of AstraZeneca is $101.5 Billion.
O)
Since Modigliani and Millers theory of irrelevance is not applicable to this case as there is tax
consideration, Modigliani and Millers trade-off theory and pecking order theory will be made use of to
suggest the best possible sources of finance that Pfizer could make use of for the acquisition and the
possible impact that could have on the stock price.
A)
The trade-off theory put forward by Modigliani and Miller considers the presence of tax and since the
payments of debts are tax deductible, for an organization it is less risky to choose debt over equity, since
it is more inexpensive than equity (Danthine and Donaldson, 2005). Even though the Weighted Average
Cost of Capital of an organization can be brought down if debt is chosen over equity, having higher debt
is always riskier choice to consider for the organization (Danthine and Donaldson, 2005). So a balance
should be found out where both equity and debt will be mixed in the capital structure, where the risk and
decreasing Weighted Average Cost of Capital will be balanced.
Since Pfizer has got nearly 70-90% of their $49 Billion, outside the US as retained earnings and one of
the main consideration that they had for the acquisition was that they could make use of this money to
go for the acquisition which if bought to US could be subjected to tax. The remaining cash in the offer
required for the acquisition can be raised by a mix of debt and equity (1:2 debt-equity ratio) that will
help in the increase of EPS and stock price.
B)
According to this theory an organization should choose their retained earnings as their primary source of
finance and if there are no retained earnings or the retained earnings is enough; an organization should
look for other sources of finance (Julius, 2012). The theory states that debt should be the second choice
of finance and equity should be considered only as the last option. According to Julius (2012), the source
of finance that an organization chooses will give an indication of the performance of the organization.
Using retained earnings will indicate that the organization is performing strongly, using debt will
indicate that the organization is confident enough of meeting its obligations, but using equity will create
a negative impression and could make others think that the organizations share prices is overvalued and
they are making money before it falls (Julius, 2012).
Since Pfizer has got a considerable amount as retained earnings kept outside the US, the organization
can make use of it as their primary source of finance and the remaining cash needed for the acquisition
can be raised by taking debts till it is fine for the company to take, as according to the theory that is the
best option for the organization after retained earnings.
P)
Recommendations
The market value of AstraZeneca as per the calculation using Discounted Cash Flow method was
only $101.5 billion, even though the offer made on May 2, 2014 was more than that, reaching
[40]
$106 billion it would be fine to raise the offer to at least $115 billion, as the synergies that can be
achieved through the acquisition is quite attractive and also the organization will get hold of
different product portfolios as well.
Another issue was that the acquisition would have caused disruptions which werent good for
AstraZeneca. Post acquisition an Absorption integration approach can be made use of by Pfizer
as there is high need for strategic interdependence and also by moving in a quick and consistent
manner, the disruptions associated with the acquisition can also be minimized.
The competitive position of Pfizer was also an issue that was looked upon in the report; there are
certain factors like HR management and Long-term investments where Pfizer has lagged behind,
so new HR policies needs to be brought in. Also Pfizer should look to make relevant potential
long-term investments that will have high returns in the future. Pfizer should also consider
overturning the decision of reducing R&D expenditure as innovation is quite important to have
competitive advantage.
One of the main issues for the rejection of the offer was that the main reason for the acquisition
attempt was to save on the taxes. A perception was created that the deal was only for cost savings
and so the acquisition will not have created any value in the long-term for anyone. So, there is a
need to convince all the stakeholders of AstraZeneca the potential strategic reasons for the
acquisition attempt and the synergies that can be achieved through the acquisition.
Pfizer will not be able consider acquisition as an option to enter the UK after cooling off period,
if the UK government agrees to the demand of the opposition party to make amendments to the
anti-takeover regulations. So Pfizer needs to consider other options and by analyzing various
modes, Foreign Direct Investment is a good option for them as there is no particular law that is
restricting any foreign investment in the UK.
In the analysis of the capital structure, two models were looked at and the sources of finance that
can be used were talked about under the relevant topic. Thus even though there was high Pfizer
stock, the shareholders of AstraZeneca will certainly receive good returns. If that doesnt
convince AstraZeneca, then Pfizer can increase the amount of cash in the offer by reducing the
stock, by paying 40% in cash and the remaining in stock.
[41]
1)
2)
3)
4)
5)
6)
Q)
The integrated case study analysis has been conducted by making use of secondary data, and which
makes the analysis less dependable. Since the secondary data that were available might not be relevant
and could be dated out.
The theories and various frameworks that were made use of will have certain limitations that could also
have impacted the recommended solutions.
6) Learning Transfer
A) Company Introduction
Daiichi Sankyo Limited
Daiichi Sankyo Limited is a Japanese Pharmaceutical Company, which is the second largest one in the
Japan. Daiichi Sankyo was formed in the year 2005, as a result of the merger between Sankyo Company
Limited and Daiichi Pharmaceutical Company Limited both the companies belonged to Japan and had
their presence in the Japanese pharmaceutical industry for more than a century. The company is also a
member of the International Federation of Pharmaceutical Manufacturers and Associations. The
company has their operations in various countries in the world including US and Germany (Beena,
2014).
[42]
Ranbaxy Laboratories
Ranbaxy Laboratories Limited is global pharmaceutical company from India, which was founded in the
year 1961 by Ranbir Singh and Gurbax Singh. The company has been a leading player in the
pharmaceutical industry ever since its establishment. The company has made their presence felt in
various parts of the world, including in countries like USA, Brazil, Russia and China. In 1973, the
company went public and the company has been recognized with various awards throughout the years
including OTC Company of the Year award (Beena, 2014).
C) Problem 1
Daiichi Sankyo was a Japanese company while Ranbaxy belonged to India. Since Daiichi Sankyo
secured 63.92% of share, they were directly involved in the functioning of Ranbaxy, which ultimately
created an integration issue mainly due to cultural difference and caused disruption in the performing of
the company (Sinha, Majumder et.al, 2014).
The researcher will make use of Post-acquisition integration approaches to choose one integration
approach that will help in resolving the issue and overcome the disruptions which will ensure smooth
functioning and achieve desired synergies.
D) Solution to Problem 1
Post-Acquisition Integration Approach
A company can make use of different integration approaches like preservation, absorption, symbiotic,
transformation and holding to overcome the integration issues that are faced as a result of Mergers and
Acquisition.
Symbiotic approach is an integration approach that is applicable when there is a need for both strategic
interdependence and organizational autonomy. In this approach there is a certain level of change
[43]
E) Problem 2
Daiichi Sankyo financed them for the deal by using a mix of retained earnings and debt. The first quarter
post- acquisition posted disappointing results for both the companies and the share prices also stayed
low and the earnings per share also were low which not something that was expected post acquisition.
The performance during the later times was also not so bright for both the companies post- acquisition,
which is another reason due to which the merger was considered as a failure (Sinha, Majumder et.al.,
2014).
The potential reason for this must have been a mistake from part of Daiichi Sankyo in choosing their
source of finance because when considering the debt-equity ratio of Daiichi Sankyo post acquisition it
has shown an increase, which indicates that there was an increase in debt which would have impacted on
the results.
F) Solution to Problem 2
Capital Structure Analysis
Modigliani and Miller Trade-off Theory
The theory put forward by Modigliani and Miller states that debt is less risky as a source of finance
compared to equity, but it is important from the perspective of a company to make sure that a there is a
balance between debt and equity as having higher debt is riskier for a company. This will ensure in
having higher earnings per share and share price.
[44]
7) Conclusion
The Integrated Case Study provided a critical analysis for both acquisitions involving Pfizer and
AstraZeneca and Daiichi Sankyo and Ranbaxy. The problems faced during the acquisition attempt and
post acquisition has been analyzed critically. The problems can be resolved with the help of the
recommendations that the researcher gave.
The study has thrown light on the importance of various business disciplines including finance, strategic
management and international business to have successful mergers and acquisitions.
8) References
Agarwal, Y (2013). Capital Structure Decisions: Evaluating Risk and Uncertainty. New Delhi:
Pearson Education Ltd, pp18-20.
Andalo, D. (2013). Can the UK's ageing population usher in a new age of economic prosperity?.
Available: http://www.theguardian.com/society/2013/dec/18/ageing-population-key-to-economicprosperity.[Last accessed 14th May 2016].
Armitage, J. (2014). Pfizer drops AstraZeneca takeover bid: American drugs giant admits defeat and
scraps offer for British pharmaceutical company. Available:
http://www.independent.co.uk/news/business/news/pfizer-admits-defeat-and-drops-astrazeneca-bid9435767.html. [Last accessed 24th May 2016].
Arnum, P. (2015). Outlook 2018: The Current and Future Direction of the Pharma
Industry. Available: http://connect.dcat.org/blogs/patricia-van-arnum/2015/08/03/outlook-2018-thecurrent-and-future-direction-of-the-pharma-industry#.V1bLDvl97IW. [Last accessed 7th May 2016].
Beena, P (2014). Mergers and Acquisitions: India under Globalization. New Delhi: Routledge,
pp220-222.
Botten, N (2009). Enterprise Strategy. Oxford: Elsevier Ltd, pp39-40.
[45]
[46]
[47]
[48]
9) Appendix
Mind Map
Low
corporate tax
Significantly
undervalued
offer
Government
Intervention
Delay in drugs
innovation
Tax credit to
encourage
innovation
Tax
inversion
Reduction in
R&D spending
Cutting
down
employees
Cost
reductio
n
Finance
Challenges
Pfizer
Acquisition of
AstraZeneca
Loss of high
quality jobs
Strategic
Management
Threatened
national
interest
Short,
Inadequate
commitments
Yips
Globalisation
Drivers
Tax Savings
High market
share
Government
drivers
Cost drivers
[49]
Mergers &
Acquisition
Strategic
method
Attain
speedy
growth
Reasons
Synergy
Cost
efficiency
International
Business
Related and
Supporting
industries
Entry
into
new
markets
Porters
Diamond
Factor
conditions
Enhanced
operating
efficiency
especially in
R&D
[50]
[51]
[52]
[53]
[54]
[55]
[56]
[57]