Financial Machination to hide poor performance - Pfizer
Two weeks ago I blogged about R&D layoffs at Pfizer (chart here), and warned that all signs were indicating Pfizer was nearing really big trouble because it had missed the boat on new technologies as it road out its patent protection looking for new ways to extend its outdated Success Formula.
Now we hear rumors that Pfizer is planning a mega- acquisition by purchasing Wyeth (chart here) for some $65B (read article here). That's about 3 times revenue for a company growing at less than 10%/year. This acquisition will most likely keep Pfizer alive - but it's benefits for shareholders will probably be nonexistent - and probably a negative. And the impact on employees is almost sure to be a net loss.
Pfizer missed the move to "biologics" - which is the term for the new forms of disease control products that use genetics, bio-engineering and nano-technology as their basis rather than a heavy reliance on chemistry and pharmacology. As a result, its new product pipeline has not met company growth needs. So now that Pfizer is buying a company with significantly biologic solutions, Pfizer leadership is sure to argue that it is filling its pipleline gap with the new solutions and all will be good going forward.
But the reality is that there are much cheaper ways for Pfizer to get into biologics than spending $65billion - a big chunk of it cash - on a huge acquistion. With banks stopped and investors realing, there are dozens of projects in universities and small companies that are begging for funding. These range from invention stage, to well into clinical trials. If Pfizer wanted to become a successful company it would
- Tell investors and customers its scenario for the future, with insights to how the company sees growth and the investments it needs to make
- Telling investors and employees the competitors that are most important to watch, and how they plan to deal with those competitors
- Disrupting its old Success Formula. Leadership would make sure all employees and management are stopped, and recognize the company needs to make a serious change if it is to catch up with market shifts and regain viability
- It would invest in multiple solution areas and multiple projects, and the allow them to operate independently as White Space where Pfizer could learn how to modify its Success Formula in order to regain growth and success in the future.
This clearly is not what is happening at Pfizer. Instead, the company is planning to take a big cash hoard, which if it doesn't want to invest in White Space it could return to investors, and spend it on a huge acquisition. We all know that almost all big acquisitions do not achieve desired goals, and that the buying investors get the short end of the stick as the selling investors achieve a premium. Why? Because the buying leaders, like those at Pfizer, are without a solution and looking for the acquisition to cover over past sins and make them look smart and powerful. So, driven largely by ego, they overpay to get a company as if that makes them the "winner."
But what happens? We can expect that Pfizer will find out it has to do something drastic to make the overpayment potentially work, and staff cuts will quickly ensue. Probably across-the-board employee cuts in the name of "synergy", but which weakens the acquired company. Then, as it absorbs Wyeth, Pfizer will push to force its old Success Formula onto Wyeth - after all, Pfizer is the "winner". But Pfizer needed Wyeth, not vice-versa. As it cuts cost, it cuts into the value they ostensibly paid for. Many of the best at Wyeth will go elsewhere to continue competing as they know produces better results. The value of the acquisition will go down as Pfizer "integrates" the acquisition, rather than raise it.
But in a year, Pfizer will declare victory, no matter what. Pfizer's revenue has been flat for at least 4 years (stuck in the Swamp) at about $48B. Wyeth's revenue has been growing at about 10%/year and is about $22B. So in a year, Pfizer can say "Revenues are now $65B, an increase of 30%". Of course, the reality would be that revenues were down 7%. Of course they will brag about their integration project, and brag about various cost cuts implemented to streamline "execution." Pfizer leadership will say they made the right move, even if all they did was use up a cash hoard in order to delay changing the company. That, by the way, is what I call "financial machination". If you can't dazzle the investor with brilliance, make a big enough acquisition so you can baffle them with bulls***.
If you're a Wyeth investor, take the money and run. You don't want to stick around for a takeover destined to lower total value and reduce the excitement of new R&D programs and medical solutions. Go find alternative companies that need cash, and help them move forward with their new solutions. If you're a Pfizer investor, don't be fooled. If the analysts cheer the takeover, and the stock pops, it's unlikely you'll get a better time to sell. The leadership has demonstrated the last 5 years, as growth has been nonexistent and the equity value has steadily declined, that they don't know how to regain growth. This acquisition is not changing the leadership, managers nor Success Formula of Pfizer that has long been producing lower returns. This acquisition is the latest in Defend & Extend moves to protect the outdated Success Formula. If this gives you an opportunity to get out - take it! Within 2 years the "new" Pfizer will be a lot more like the old Pfizer than Wyeth.