Did Pfizer Pay The Right Price For Allergan?

Pfizer‘s (NYSE:PFE) recently announced its plan to acquire Allergan in a $160 billion deal. The company will pay a premium of $37 billion for the acquisition over where the stock traded prior to the deal’s publication. We believe that to justify the premium paid, Pfizer will require synergies of the order of approximately 10% of SG&A expenses of the combined entity along with nearly $0.5 billion in tax savings due to a change in its corporate base from the United States to Ireland. The net present value of Pfizer’s share of the aforementioned savings comes to around $32 billion which is close to the acquisition premium. However, the company’s expectations in terms of synergies are meaningfully lower which makes the overall price questionable.

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What Motivated Pfizer to Acquire Allergan?

The potential reduction in taxes and increased portfolio diversification appear to be the primary incentives behind this move. The deal will bring in total revenues of around $60 billion. The combined company’s drug portfolio would include Viagra, Celebrex and pneumonia drugs and will give Pfizer access to about 70 additional markets for Allergan products, such as Botox wrinkle treatment, the Alzheimer’s drug Namenda and dry-eye medication Restasis. Overall Pfizer’s drug portfolio will become more diversified and give it a competitive advantage.

Pfizer had previously tried shifting its corporate base to the UK by trying to acquire Astrazeneca, but the deal did not go through because the shareholders of Astrazeneca did not approve the deal. However, this time it is expected that Pfizer will be able to successfully complete the acquisition.

Is $37 Billion Premium Justified?

We estimate that Pfizer could potentially realize synergies of 10% SG&A expenses of the combined entity each year, reducing costs by roughly $2.0-$2.2 billion. In addition to that, Pfizer would realize an average of $0.5 billion in tax savings (Pfizer is expected to pay a tax of 17% in Ireland compared to an effective tax rate for Pfizer in the US of 21%).We estimate the present value of total future savings for Pfizer to be nearly $32 billion

However, Pfizer believes that the merger will result in a total cost savings of $1.87 billion for the first three years, which will result in a present value of synergies of about $14 billion. Hence, there is a chance that Pfizer might have overpaid for this.