Question

As you learned, mergers and acquisitions can be beneficial for companies (and sometimes, less than beneficial). After watching the videos in the folders above, think of two companies that could benefit from a merger or potential acquisition for a company. Why would this deal make sense? What would be some potential pitfalls?

Answer 1

The two companies that will benefit from a merger are – Pfizer and Allergan. In fact Pfizer should potentially acquire Allergan.

This deal will make sense because of a couple of reasons. First of all it will help the merged entity derive geographical synergies as both the companies have strong markets in different geographies. It will also lead to supply chain synergies for the merged entity. Secondly Pfizer can leverage Allergan’s portfolio of branded and biosimilar pharmaceuticals. This will give the merged entity the benefits of size and the merged entity will most likely become the world’s largest drug maker. This will make the deal accretive to both cash flows as well as earnings of the merged entity.

Some potential pitfalls could be the high valuation of Allergan. The company currently has a market capitalization of $52.399 billion and an enterprise value of $73.67 billion. So if the assured benefits related to the merger do not come through in a systematic and proper manner and if the merger faces integration problems then the deal will prove to be too expensive and the anticipated value accretion will become highly difficult to achieve.