Pfizer CEO Jeff Kindler must have a case of the Ken Lewis’s because he just made a terrible acquisition. Pfizer has become nothing more than a big boring Pharmaceutical firm with low organic growth, a weak pipeline and rising competitive risks. The company has displayed a phenomenal lack of creativity in generating earnings over the past 10 years and the stock chart represents this.
Analysts say “The deal appears to have a good fit as the operations of the two companies are complementary and there seem to be no major product overlaps.” That’s the whole problem with the deal. Investors don’t want more Pfizer. They want a different Pfizer. Companies need to evolve as they grow. Instead, they’re spending $68 billion on a deal that does little more than add some debt to the balance sheet and make them nearly twice as large.
Wyeth has 10 year revenue growth of 5.6% and 10 year operating income growth of 7.2% vs Pfizers 6.83% operating income growth. This deal hasn’t added any growth. The only marginally beneficial thing that comes out of this deal is some cost cutting and some pipeline diversification. But that isn’t what Wall Street wants. Investors don’t buy stocks purely for dividend growth (at least the smart ones don’t). Equities should always have some built-in organic growth to justify the risk of owning them. But Pfizer’s organic growth has become marginal at best.
For $68B PFE could have bought any number of high growth bio-tech firms. Amgen alone, though not the most compelling, would have been a very intriguing combo. There are so many high growth biotechs out there that it amazes me how they could make such a deal. Investors don’t want Pfizer to solidify its status as a big boring pharma – they want pipeline diversification and organic growth. Wyeth doesn’t accomplish that.
On the bright side, PFE did cut that ridiculous waste of a dividend in half. Too bad the only benefit is that it gives Ken Lewis, I mean, Jeff Kindler, more cash to burn. Literally.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
