Will Pfizer India make an open offer to Wyeth’s shareholders or will the two merge?

Pfizer is acquiring Wyeth for $68bn in a cash and stock transaction. Both companies have listed subsidiaries in India, Pfizer Limited and Wyeth Limited. The first point of interest for Indian shareholders will be whether this will result in an open offer for Wyeth. It will not, because the transaction has been styled as a merger agreement, in which Pfizer will pay the consideration in cash and stock. Under the Sebi Takeover regulations, an acquisition by way of merger will be exempt from the compulsory open offer clause.

The two companies will obviously merge their operations in India, though. It could be an operational merger, where they have common teams for various functions but continue to function as separate entities. Or it could be a formal merger, involving both listed companies. For example, P&G Hygiene and Healthcare and Gillette India continue to be two separately listed entities, even though crucial functions like marketing and selling have been integrated.

One determining factor will be the effect of the merger on Pfizer’s shareholder in Pfizer Limited. At present, it has a 43% shareholding with the rest being held by public and financial institutions. LIC is a large shareholder in the company. Wyeth has a 51% shareholder in Wyeth Limited with Atul Limited holding 6%, taking the total promoter shareholding to 57%. That could potentially dilute Pfizer’s stake in the combined entity, depending on the merger ratio.

If we assume the current share prices as the basis for determining the merger ratio, we have Rs 525 a share for Pfizer Limited and Rs 434 a share for Wyeth Limited. Wyeth shareholders would therefore get four shares of Pfizer for every five held in Wyeth. Pfizer Limited’s equity base is 29.84mn shares while that of Wyeth Limited is 22.72mn shares. A merger ratio of 4:5 will see Pfizer Limited’s equity increase to 58.4mn shares and Pfizer’s shareholding come down to 37%. It could go up to 39% if it convinces Atul to part with its stale. Pfizer is unlikely to be pleased at the prospect of a lower stake and may endeavour to either get a more favourable merger ratio or may not contemplate a merger at this stage.

Thus, there may be very little for their shareholders to cheer directly as an outcome of the merger. The longer term may see benefits in the form of lower costs, better efficiencies and a wider presence in the pharmaceutical market. Which of the two companies benefit more from the global acquisition remains to be seen. The stock market’s final reaction to the merger has been lukewarm; the street seems to have got it right this time.

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