Managing International Acquisitions

Financial Analysis of Mergers and Acquisitions

In the past few years, the amount of mergers and acquisitions have dramatically increased, raising the importance of the strategies and financial analyses performed before the merger or acquisition is expected to occur. Financial, operational, and technical due diligence have become routine undertakings before companies consummate a merger or acquisition. A review of the literature indicates that the strategies employed have a significant impact on whether the merger or acquisition is a success. An example of a very successful strategy that has been implemented several times in the acquisition or merger of companies is the strategy employed by Pfizer. A strategy that did not work out as well is portrayed by Matsushita in its' failed acquisition with MCA. This paper will illustrate and analyze the strategies employed in such transactions in addition to the financial outcomes of the deals.

Pfizer's overall business philosophy has its' roots in the strong sales of prescription pharmaceuticals, in connection with Pfizer's ultimate mission to become the world's most valued company to patients, customers, investors, colleagues, business partners and the local communities. On April 16, 2003, Pfizer acquired Pharmacia Corporation for a purchase price of approximately $56 billion, which included the issuance of approximately 1.8 billion shares of Pfizer common stock, 180 million options on Pfizer common stock, and vested share awards, as well as transaction costs (Tsao, 2004). By acquiring Pharmacia, Pfizer created the world's largest pharmaceutical company. This acquisition gave Pfizer the scientific depth, global marketing strength and financial resources to take greater advantage of new opportunities and to bring innovative new products to the market faster. Revenues increased 40% to $45,188 million in 2003 and 12% to $32,373 million in 2002 (Tsao, 2004). Reports have indicated that revenue increases in 2003 were primarily due to the inclusion of Pharmacia products and strong performance by Pfizer's in line and new launched products across businesses and regions.

In another acquisition, Pfizer exchanged 2.75 shares of Pfizer common stock for each outstanding share of Warner-Lambert stock in a tax-free transaction valued at $98.31 per Warner-Lambert share, or $90 billion, based on the closing price of $35.75 (Tsao, 2004). This represents a 34% premium over the average closing prices of Warner-Lambert during October 1999 (Tsao, 2004). The combined company estimated annual revenues of approximately $28 billion, including $21 billion in prescription pharmaceutical sales, and a market capitalization in excess of $230 billion (Tsao, 2004). By combining both Pharmacia and Warner-Lambert, Pfizer was able to create a financially strong, and fast-growing, major pharmaceutical company in the world. The combination of Pfizer and Warner-Lambert are intended to represent a new competitive standard for the industry.

Pfizer has maintained a very consistent growth in sales over a 10-year period. The merger with Warner-Lambert explains a discontinuity in 1999 to 2000. The compound annual growth rate from 1992 to 1998 is around 18%, and if the results for 2000-2001 are excluded, the growth rate becomes 12.6% (Wood, 2004). In fact, the growth rate slows from 2000 to 2001 becoming 8.5% (Wood, 2004). The recent quarterly figures also support a slight decline in growth; the percentage change is 11.4%. The growth in earnings for Pfizer has been stellar. With a minor drop in 1993, Pfizer has a compounded annual growth rate of around 20% in its bottom line (Wood, 2004). At a growth rate of 10%, the projected value of sales in five years is $51.7 billion (Wood, 2004). Following the merger with Warner-Lambert, the shares outstanding jumped dramatically.