When Pfizer Inc. (PFE, Financial) and Allergan Plc (AGN, Financial) announced their proposed merger deal collapsed on April 6, so too did the hopes of several influential hedge fund managers who staked much capital on its success, but some investors have seen benefits.
Both companies had been working toward the $160 billion merger since December, which would have re-introduced a focus on dermatology to Pfizer and created the world’s largest drug company. It would also have famously moved the headquarters to Ireland, where the corporate tax rate is 18% compared to 35% in the U.S.
A decision by the U.S. Department of Treasury that introduced new regulations making tax inversions less lucrative on April 4 ended the deal.
"We are announcing additional actions to further rein in inversions and reduce the ability of companies to avoid taxes through earnings stripping,” Treasury Secretary Jacob J. Lew said in a statement.
The news sent Allergan’s shares plunging roughly 15% in one day. Several funds were the most hurt, according to their share holdings at the end of 2015: Andreas Halvorsen (Trades, Portfolio), the largest hedge fund owner, had 7.94% of his Viking Fund equity portfolio in the company, with almost 6 million shares. The next biggest, John Paulson (Trades, Portfolio), owned 1.4% of shares as 10.6% of his stock portfolio, and Dan Loeb had 17.1% of his portfolio in the company with 1.4% of shares outstanding.
Loeb’s $17 billion asset management firm, Third Point, was already down 2.3% through the first quarter, versus a 1.3% rise in the S&P 500.
But unlike Allergan, a specialty pharmaceuticals company and maker of Botox, Pfizer’s shares jumped on the news of the deal’s demise. In the past five days, the stock gained 7.4%, bringing investors back to about even for the year to date. At $32.40 per share Friday afternoon, Pfizer has rebounded almost back to its five-year high of $36.46 reached in July, as investors felt Pfizer was better off without Allergan and remaining in the U.S.
The funds that held Pfizer tended to be long-term investors in the company, unlike Allergan, where the top guru shareholders had piled on more recently. The top five guru investors in Pfizer held it for more than five years. The top five investors in Allergan started their positions from late 2012 to mid-2014.
Allergan holders also bet bigger on the stock, with the largest, Daniel Loeb (Trades, Portfolio), dedicating 17% of his long portfolio to it, followed by John Paulson (Trades, Portfolio) at 10.6%. The fund with the biggest allocation to Pfizer, Kahn Brothers (Trades, Portfolio), made it 9.1% of their portfolio.
Income investors often buy established, slow-growth pharma company Pfizer for its healthy dividend. Pfizer has a 3.48% trailing dividend yield and 101% payout ratio, in addition to buying back shares at a rate of 6.5%.
Allergan by comparison pays no dividend, has cash of $1.1 billion and invests heavily in research and development. The company also has 70 mid- to late-stage products and $40 billion in cash from the sale of its generics business to Teva Pharmaceuticals (TEVA, Financial), expected to close in June 2016, to spend on growth opportunities.
Pfizer said it would continue to focus on its recent product launches and late-stage pipeline of new therapies.
“Pfizer approached this transaction from a position of strength and viewed the potential combinations as an accelerator of existing strategies,” Pfizer chairman and CEO Ian Read said in a statement.
Going forward, Pfizer could still use its $23 billion cash position to pursue other deals, acquisitions and business development. It will also continue with its unchanged plan to potentially separate its established businesses by the end of 2016.
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