- The US government killed the Pfizer-Allergan deal by reinterpreting its law against inversion.
- The cancellation means Pfizer has assets but no strategy.
- Will it find its footing again, or just new merger partners?.
The announcement that the deal would be terminated came just one day after the U.S. Treasury Department announced it was interpreting its regulations in such a way as to make the deal, as described last year, impossible to pull off.
The question now becomes whether Pfizer stock is worth buying, today, based on current fundamentals and prospects? The answer is yes.
Pfizer is a cash flow monster, generating $15 billion in positive free cash flow each year. The company carries nearly $24 billion in cash and short-term securities on its books, and its 30 cent/share dividend represents a yield of 3.82% to investors at current prices.
The hope with the Allergan merger was that the combined company would generate capital gains from the acquisition strategies of Allergan CEO Brent Saunders. While that is out, this company is still a very attractive yield investment.
Reading Pfizer CEO Ian Read’s letter to the Wall Street Journal after the merger was called off, you might think that Pfizer is a sell. In it, he notes that high U.S. corporate tax rates make companies highly vulnerable to takeover by foreign rivals while making it very difficult for them to buy overseas firms.
But there were downsides to the merger. Small shareholders and retirees would have faced huge tax bills. Pfizer had already begun re-arranging its corporate suite to accommodate Allergan and those plans now have to be reversed.
Still, there are things Read can do. He can sell units to foreigners, rather than the whole company, which would bring in cash that can either be handed back to shareholders or re-invested in the business. The company’s underlying problem remains a stale pipeline and the ongoing “patent cliff,” with Lipitor having gone generic without being replaced.
Pfizer had nearly $23 billion in cash and short-term investments on its balance sheet at the end of the year, money that could be used to address its problems, either by investing in research or buying early-stage drug companies. Read’s point is that Allergan, with its Irish domicile, has an advantage in these coming fights, and while it’s a good argument, that shouldn’t distract investors from the real story, which is that Pfizer’s 3.82% yield is being covered easily by net income, and the rest of the noise surrounding the company is, in the end, positive speculation that should result in profitable deals down the road.