Pfizer’s (PFE, Financial) decision not to divide the company received mixed reactions from the market, and the stock has been slowly moving down since August. The rumors about Pfizer’s split accelerated after the company’s failed attempt to merge with Allergan PLC (AGN, Financial), which could have benefited the company in many ways.
One of the biggest headaches Pfizer has been facing in the last few years is that there are parts of its business that are growing and parts that are slowing down. The company tried several approaches to get over the bump in the road: trying to merge with Allergan, shifting its tax address overseas and even mulling over splitting itself into two parts or buying smaller companies with promising product lines. Of the three, only the last one seems to have gone well so far; the company was able to buy Hospira (HSP, Financial) last year and Medivation (MDVN, Financial) this year.
Mergers and splits are not an uncommon occurrences in the pharmaceutical Industry. If there is some value that can be unlocked, then companies do tend to take that route. A few years ago, Abbott Laboratories (ABT, Financial) split itself into two parts: Abbott Laboratories, specializing in diversified products including medical devices, diagnostic equipment and nutrition products, and AbbVie (ABBV, Financial), which operates as a research-based pharmaceutical manufacturer.
Abbott Laboratories Chief Financial Officer Tom Freyman on the split:
“Our CEO talked with the board about the changing environment, changing markets. He also interacted with our investors, who also struggled with two different businesses under one roof.
“It went quite well. It was one of the most successful spinoffs in the market. Separate, we were valued more than together. The combined stock has increased 78% since the separation was announced in October 2011.”
So there is indeed a live example of why that strategy could work at Pfizer. Put simply, splitting into two units – generally, with one unit taking most of the forward-looking products and the other taking over the problem areas – increases transparency and allows the forward-looking business to be priced at a better level, which more often than not covers the low valuation the other unit inevitably receives.
So, when Pfizer announced that the company was not considering a split anymore, the market reacted by pushing the stock to edge lower.
“Pfizer Inc. decided not to split in two separate companies, opting against what could have been one of the biggest breakups in the drug industry’s history after years of what it called an 'extensive evaluation.'”–Bloomberg
Now that the company has clearly announced its intentions, the issue can be put to rest and Pfizer can move ahead. Hopefully, this should allow the stock to correct itself upward – a good sign for new investors in Pfizer or people looking to add to their positions.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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