Trang Tran, Yinjia Hua, Xiaoyi Zhou, Wei Luo - Group 3
Professor Nina Dorata
Business Combinations – ACC 638 (T, 6:55pm-9:20pm)
11 May 2011
Pfizer & Wyeth When Pfizer announced an agreement to buy Wyeth in January 2009, it was expected to not only create a pharmaceutical behemoth which would be the biggest merger since AT&T and BellSouth in March 2006 (according to the research firm Capital IQ but also would be an extraordinary event in such a financial crisis for the period 2008-2009 because this was not a desperate merger of two financial institutions orchestrated by the government. Moreover, since after 12/15/2008, a new accounting standard that requires acquisition method for business combinations has been taken into effect. Therefore, the acquisition of Pfizer and Wyeth has been one of the most interesting deals recently. Although credit was tight that time because of the financial turmoil, Pfizer borrowed about $22.5 billion from five banks to cover the Wyeth purchase; the remainder was financed through a combination of cash and stock. The deal closed in October 15, 2009. At that time, the whole Wyeth outstanding common stock was about 1,339.6 million; the closing price of Pfizer stock was $17.66; Wyeth stock option canceled was about $405 million and Wyeth restricted stock canceled was about $320 million. Accordingly, the total purchase is $68,236 (Appendix A). Other related accounting and consulting costs was recorded as expense at the acquisition date. Because acquisition method requiring the expensing of transaction costs as incurred and capitalization of in-process research and development costs at fair value to decrease the realized goodwill which might be impaired later on, this did significantly impact on the accounting for the acquisition of Wyeth in 2009.
The goodwill of is $19,954 (Appendix A) as part of the acquisition of Wyeth includes:
1. The expected synergies and other benefits that Pfizer believe will result from combining the operations of Wyeth with the operations of Pfizer.
2. Intangible assets that do not qualify for separate recognition, and unidentified projects and products
3. The value of the going-concern element of Wyeth’s existing businesses The target of this combination is more protection to the two giants than investment. The severe expected lost on drug selling due to patent protection's expiration makes this two giants come together. It looks like it was just a short term convenience driven by Pfizer's need to soar the bottom line. Particularly, Pfizer has not been working on its own business since last 5 to 7 years but used their cash to buy other companies out such as: Warner-Lambert, Pharmacia, etc. None of those buyouts brought real benefit to the company's bottom line. However, with the combined biopharmaceuticals business, the new combined company was expected to perform in a leading role in primary and specialty care, small and large molecules. Before the merge, these two companies were facing an expected business lost due to cheaper rival generics medicine. Pfizer was going to lose billions of its cholesterol treatment Lipitor. So did Wyeth, it's losing its patent protection on its best selling Effexor XR. Therefore, they believe that the buyout would allow Pfizer and Wyeth to protect themselves from revenue dropping when losing patent protection and diversify the new company's product portfolio because Wyeth was going to bring its presence in biotech drugs and vaccines. The combination was also expected to allow the new company to cut cost by cutting overlapping operations and spending their money wisely. Indeed, this acquisition boosted Pfizer’s performance: Revenues were up 54% in the first quarter of 2010 (Seeking Alpha) and the profit was reported a 9 percent increase in the second quarter of 2010 (New York Times). At the time of the announcement of the merger, Jan 26, 2009, Wyeth’s stock price raised to over $0.5 a share because Pfizer agreed to pay $68 billion to purchase Wyeth and it might be also considered the hottest news on such a frozen market. However, on the next day of the announcement, the Wyeth’s stock price fell 0.5 percent to $434.20 and the Pfizer’s stock price fell 10.3 percent to $15.65. Definitely, the news of merger had a very negative influence on Pfizer’s stock price because the company had to borrow money to finance the deal and that looked really bad on its debt. Moreover, due to the financial crisis, mostly the U.S. stocks decreased. Therefore, after the initial announcement, the Pfizer’s stock price was fluctuated from $15.65 to $12.70 during next 30 days. On the closing deal day, Moody’s even lowered the long-term rating of Pfitzer Inc to A1 from Aa2. However, in afternoon trading as of October 15, 2009 (the completion date), Pfizer shares rose 9 cents to $17.46 while Wyeth added 12 cents to $50.16. Specially, based on the price trend through the two price charts (Appendix B & C), the stock prices of Pfizer and Wyeth were increasing although there were fluctuations sometimes. In sum, it is too early to state that the acquisition of Pfizer and Wyeth is successful. However, with the results from the financial statements, this deal can be considered paying off Pfizer so far.
APPENDIX
Appendix A: Acquisition Analysis

The total purchase is calculated as follows: Cash = $33*1339.6= $44,208 The value of stock in exchange = $17.66*1339.6*0.985 = $23,303 The total purchase price = $44,208 + $23,303 + $405 + $320 = $68,236
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Appendix B: Pfizer Price Chart

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Appendix B: Wyeth Price Chart

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REFERENCES

1. Securities and Exchange Commission v. Pfizer INC, October 15, 2009. Form 8-K found at http://www.sec.gov/Archives/edgar/data/78003/000115752309006893/a6067068ex991.htm 2. Securities and Exchange Commission v. Pfizer INC, March 27, 2009. Form S-4 found at http://www.sec.gov/Archives/edgar/data/78003/000095012309005583/y74822s4sv4.htm#118

3. Securities and Exchange Commission v. Pfizer INC, March 27, 2009. Form S-4/A found at http://www.sec.gov/Archives/edgar/data/78003/000095012309013052/y74822a3sv4za.htm

4. Securities and Exchange Commission v. Pfizer INC, June 28, 2009. Form 10-Q found at http://www.sec.gov/Archives/edgar/data/78003/000115752309005774/a6022539.htm

5. Securities and Exchange Commission v. Pfizer INC, February 27, 2009. Form 10-K found at http://www.sec.gov/Archives/edgar/data/78003/000119312509040568/d10k.htm

6. Securities and Exchange Commission v. Pfizer INC, February 26, 2010. Form 10-K found at http://www.sec.gov/Archives/edgar/data/78003/000119312510042425/d10k.htm

7. Pfizer Agrees to Pay $68 Billion for Rival Drug Maker Wyeth, Andrew Ross Sorkin and Duff Wilson, New York Times, January 25, 2009 found at http://www.nytimes.com/2009/01/26/business/26drug.html

8. Behind Pfizer’s Deal to Buy Wyeth, Time, January 26, 2009 found at http://www.time.com/time/business/article/0,8599,1873945,00.html

9. Moody’s Downgrades Pfizer on Wyeth acquisition, Marketwatch, October 15, 2009 found at http://www.marketwatch.com/story/moodys-downgrades-pfizer-on-wyeth-acquisition-2009-10-15

10. Pfizer’s Earnings boosted by Wyeth Acquisition, Seeking Alpha, May 4, 2010 found at http://seekingalpha.com/article/202761-pfizer-s-earnings-boosted-by-wyeth-acquisition

11. Its Acquisition of Wyeth Appears to Be Paying Off for Pfizer, New York Times, August 3, 2010 found at http://www.nytimes.com/2010/08/04/business/04pfizer.html