May 27 2014: The Failed Pfizer / AstraZeneca takeover bid
Pfizer’s audacious bid to takeover AstraZeneca is dead, for the moment. Had Pfizer succeeded, it would have been the largest takeover in UK corporate history. Whatever impact the deal would have had on the two companies involved, it would have also had profound implications for British science, exports and jobs in one of the most important sectors of the UK economy. As well as important private interests being at stake, there were also clear and distinct public interests in the deal. It was evident from the start that the takeover was being pursued for the wrong reasons and as such it would be bad for AstraZeneca, and in result bad for the UK.
It is to the credit of the AstraZeneca board that they remained clear-headed in the face of intense pressure and that, in this case, it was the board that rebuffed the offer. That is the way it should remain, it should be the existing owners of a company – the shareholders and their agents – who should determine future ownership. Here the system appears to have ‘worked’.
So this the story of how the government misjudged the situation, being readily seduced into becoming cheerleaders for a deal which ministers mistakenly viewed through a narrow, political lens as an endorsement of their tax policy:
In November 2013 Pfizer’s chairman and chief executive Ian Read made an initial approach to AstraZeneca’s chairman Leif Johansson. Pfizer subsequently made a more formal approach on 5 January 2014, valuing the company at around £60bn. A week later the AstraZeneca board rejected the offer as “very significantly” undervaluing the company, offering too little cash (30 per cent), and being too risky in terms of execution. The £60bn price tag would have made it among the largest transactions in UK corporate history.
On 26 April 2014, Pfizer made a second approach, which was also rebuffed. With the deadline imposed by the City Code on Takeover & Mergers fast approaching, Pfizer made two further offers on the weekend of 17 May, eventually valuing the company at almost £70bn in what was a final offer. Again, these offers were rejected by the AstraZeneca board without reference to shareholders.
Under the Code, Pfizer then had until 26 May to ‘put up or shut up’ with a firm offer. The significance of the deal went far beyond the price tag. The potential transaction went to the heart of the debate about the quality of jobs in the UK and the need to reform our economy so it is better balanced and more sustainable in the long term.
The question was whether the purchase – foreign or otherwise – of AstraZeneca would strengthen the company over the long-term. Would it help grow a world-leading pharmaceuticals industry and would it expand research, science and skills base? If not, would it have such a material and adverse impact on our economy that it would necessitate government action to safeguard the national economic interest? These were the questions asked of scientists, business leaders, and Ministers alike. Nobody positively made the case for the deal to go ahead.
Indeed the voices raised were those who would not usually argue for government involvement in the economy they were now vigorously making the case that the government should act to safeguard the national economic interest. Others urging action included the leading businessman and former Science Minister, Lord Sainsbury, who went public with his concerns, as did the former CEO of Standard Chartered Bank, Lord (Mervyn) Davies. Lord Heseltine expressed his reservations too, along with the Chief Executive of Aberdeen Asset Management. The Director General of the British Chambers of Commerce, John Longworth, put it well when he said: “we must remember that there’s a lot more to being an open economy than saying ‘yes’ to every takeover”. Of great concern was Pfizer’s record of acquiring other companies, intellectually asset-stripping them, cutting R&D spending, and shutting down research facilities with large consequent job losses.
So the worry in the science and business community in light of all this was for the long term future of the company and the sector. In spite of this, the initial response of the government looked to the short term. It seemed that the prospect of being able to boast of bringing one of the world’s largest companies on to the Exchequer’s books in the clouded their judgement on the longer-term consequences of the deal. Sources close to George Osborne had said the bid was, “a massive vote of confidence” in the UK and Grant Shapps said the takeover could be, “a great Anglo-American tie-up”. Treasury Minister David Gauke said the deal showed how, “the UK is now very much top of the list for foreign companies looking to increase their activities.
In his eagerness to take ownership of the deal as an endorsement of government policy, the media were briefed that the Prime Minister had appointed Cabinet Secretary Sir Jeremy Heywood and senior Treasury official John Kingman to, “negotiate” with Pfizer. In doing so, it both undermined the AstraZeneca board who had so far rebuffed Pfizer and gave the impression that the government were driving the deal. This impression was reinforced when AstraZeneca Chairman Leif Johansson was reported to have asked the government to take a more neutral stance.
In seemingly promoting the deal, the government found itself out of step with the business and science communities, and on the wrong side of the argument. Ministers also failed to appreciate the extent to which the desire to use tax inversion in the US was driving the deal – tax inversion being a loop hole in US law where a company can re-incorporate overseas in order to reduce the tax burden on income earned abroad. Ian Read – who started off in the accounts department at Pfizer – admitted in his evidence to the BIS select committee that one of the principal rationales for the deal was tax planning. Sir David Barnes, former CEO of AstraZeneca, put it well in an email saying, “whilst all companies should manage their tax affairs efficiently, tax should not be the driving imperative for such a transaction. Whilst there is potential (substantial) tax advantage for Pfizer through tax inversion, that is a narrow basis on which to build an enduring and constructive business partnership”.
Pfizer asserted at the Select Committee hearing on 13 May 2014 that the US was unlikely to act to end the use of tax inversion. No sooner did they do so than numerous powerful US senators – Democrat and Republican – were demanding action to stop it the day after. Now, Michigan Democrat Senator Carl Levin has introduced a bill to place a moratorium on corporate inversions for two years while the US tax code is reformed.
The 26 May deadline passed and AstraZeneca fought off the current threat from Pfizer. Under the rules, Pfizer will be prevented from making another attempt to buy AstraZeneca for at least another six months. But others may try before that, and the threat of similar takeovers in the pharmaceuticals sector and elsewhere in the future always remains. Britain has benefited enormously from inward investment which – along with the money – has also brought new ideas and ways of working. The UK must remain open to business and as an attractive destination for investment, not as a global tax-avoidance scam, but because of the positive benefits the UK is able to offer innovative companies.
June 2 2014: Just let me ask the wife says Sir Jeremy – Cabinet Secretary Sir Jeremy Heywood advised the Prime Minister on what view to take on the Pfizer takeover bid for its British rival AstraZeneca. As it happens, his wife had written a report, circulated to politicians, advising pharmaceutical firms to restructure, including mergers with rivals, ‘to navigate turbulent times’. Although the Pfizer bid has now been withdrawn, some wonder if Heywood should have been involved given that he might be suspected of sharing the view of Lady Heywood and her employer, McKinsey. husbands/wives?