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Pfizer and Dow Chemical Merger Talks and Dividend Cut

Companies / Mergers & Acquisitions Jan 28, 2009 - 11:24 AM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleNilus Mattive writes: I can't believe how quickly things are changing in these markets! One trading day after I sent out my latest issue of Dividend Superstars , two firms that are widely held by investors announced both merger news and dividend policy changes.

I've covered both of these companies in past Money and Markets issues, too. So today I want to do something a little different, and give you my thoughts on this news.

Let's start with what I consider the bigger of the two stories …

Pfizer Buying Wyeth, and Cutting Its Dividend!

For a long time, I've said Pfizer was going to have to do something about its future business prospects. After all, the company's biggest drug — Lipitor — will start facing generic competition in 2011. And Lipitor currently represents about a quarter of PFE's sales.

Acquisitions looked like the most logical way for the company to jumpstart its pipeline. I figured Pfizer would ultimately decide to snap up a major biotechnology company, or a few smaller ones, as a way to get promising drugs and niche R&D operations at a reasonable price.

The rumors have recently pointed to just such a purchase — namely, a buyout of Amgen.

Then, the idea of a Wyeth buyout started making the rounds. And yesterday, we got confirmation that Pfizer does intend to make the deal happen, for a price of about $68 billion.

What does PFE get for that money? More to the point, what will Pfizer's shareholders get for that money?

First, the bad news. The company said it will cut its current dividend in half. The announcement comes shortly after Pfizer decided not to raise its shareholder payment for the first time in 42 years. So to say that this follow-up dividend cut is a disappointment is a gross understatement.

However, the shares will still produce a rather respectable yield for investors (about 4% based on the current price). More importantly, the Wyeth acquisition could prove a major boon to PFE's profits in just a year or two.

With Wyeth, Pfizer is going to get plenty of cost savings and a whole new array of drugs to market.

According to the company's CFO, total savings could hit $4 billion by the end of 2012. Part of that will come from layoffs, unfortunately. In the last few weeks, Pfizer already said it will slash 800 research jobs and 2,400 sales positions. It announced another 8,000 cuts yesterday, and said it plans to reduce the combined entity's workforce by a grand total of 15%.

That's just part of the story though. Assuming the deal passes muster with both regulators and Wyeth shareholders, the new combined company will boast 17 different products each worth a billion or more in annual sales. That's an awful lot of money coming into the corporate coffers, and I wouldn't be surprised to see the dividend payments start heading back up in a hurry.

Lipitor currently accounts for a quarter of Pfizer's revenue. Wyeth will help the company diversify.
Lipitor currently accounts for a quarter of Pfizer's revenue. Wyeth will help the company diversify.

Does the deal completely solve Pfizer's pipeline problems? No. Wyeth is facing a couple key patent expirations of its own. But from a quick initial analysis, it looks like PFE's shares will command a substantially higher price a year or two from now.

For that reason, I think anyone holding this stock should consider staying the course, and accepting a lower dividend payment for a solid total return.

I recognize that PFE shares fell substantially on the release of the news. But that's the way these announcements typically play out. The acquired company's stock enjoys the upside, while the acquiring company is second-guessed six ways to Sunday.

It didn't help that Pfizer also announced poor quarterly results on the same day as the deal news, either. The company said fourth-quarter profits fell 90%.

But again, I'd suggest you take a deeper look at the release. For starters, the plunge was mainly related to a legal matter. Revenues declined just 4%, which is pretty darn good given the severity of the recession. And if you exclude the legal charges, PFE actually earned $0.65 a share vs. $0.40 a year earlier.

My point is simple: Short-term events — including quarterly earnings releases and even some dividend cuts — don't tell the whole story. In Pfizer's case, I still think there are plenty of reasons to be optimistic, especially at these depressed prices.

Meanwhile, Rohm & Haas Says NO Merger, and Contemplates a Dividend Cut of Its Own …

In other merger news, it looks like Dow Chemical will not be able to complete its purchase of Rohm & Haas on time (if ever). You might remember that I discussed this merger back in July 2008 .

Dow Chemical is now trying to back out of the deal due to “unacceptable uncertainties on the funding and economics of the combined enterprise.”

Dow is  trying to back out of its Rohm & Haas purchase, and considering the first  dividend cut in a century.
Dow is trying to back out of its Rohm & Haas purchase, and considering the first dividend cut in a century.

What they're really trying to say is that the swift decline in commodities prices has made ROH a less attractive purchase, particularly given what's happened to share prices and credit conditions since the deal was initially announced.

To make matters more complicated, Dow's CEO Andrew Liveris said this morning that a dividend cut is another “one of the things we would strongly look at.”

That would be a heck of a move considering that Dow has paid a dividend every year since 1912 without one single decrease! And it's even more shocking considering what the CEO said on December 8 …

“We will not break that string [of dividend payments] … not on my watch.”

What happened between then and now? Liveris explains it this way:

“The world has changed in the last 30 to 45 days. The world is telling me that my dividend is too high.”

In my opinion, that's a copout. The world should not tell Dow what the dividend payment ought to be. Dow should examine its financials and determine for itself what the dividend should be. Nothing in the last month or two has been more challenging than many of the challenges Dow has faced in the last century!

But clearly sentiment in the boardrooms of some of America's most conservative companies has gotten perversely negative. No deal is too sacred to break. No dividend streak is too storied to end. And the lesson for investors is that nothing is guaranteed in this volatile market.

On the other hand, there are still great companies that will continue to reward shareholders through thick and thin. And there are new beneficial mergers being announced even in this challenging time.

So my general investing philosophy remains the same — buy a range of quality holdings, exercise patience, take profits from time to time, and don't expect miracles … just solid long-term results.

Best wishes,


P.S. This is just a taste of the kind of analysis I give my Dividend Superstars subscribers every month. If you aren't yet getting my issues, what are you waiting for? Get a full year's worth of Dividend Superstars for just $39. That's only $3.25 for each blockbuster issue delivered right to your e-mail inbox! Plus, to save you time and trouble — and to make sure you never miss a single issue — I'll automatically renew your membership at this ultra-low rate until you tell me to stop. Click here to start your subscription right away.

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