Pharmaceutical company Pfizer Inc.’s $68 billion (Rs3.33 trillion) purchase of Wyeth shows the irony of the government’s bank bailout. The takeover of the maker of Preparation-H and Chapstick is being greased by $22.5 billion in loans from a consortium that resembles a who’s who of Troubled Assets Relief Program, or TARP, recipients. Using taxpayer money to fund Pfizer’s deal and its ensuing corporate bloodletting will put the new government’s belief in free markets to a much-needed test.
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Pfizer’s acquisition is predicated on massive job cuts—perhaps as many as 19,000 workers in the combined company, or 15% of the combined group’s workforce. Pfizer also has a history of exceeding its cost-cutting targets from takeovers, so that number could rise. This is what gives the banks—which have lots of cash, thanks in part to government intervention—incentive to lend to Pfizer.
The company currently has net cash and the combined firm will have some $31 billion of Ebitda (earnings before interest, taxes, depreciation and amortization) to pay off its obligations. Therefore, lending money to the merged entity looks like a safe and easy way for banks to make some profits, which would ultimately bolster banks’ capital and smooth their capacity to lend. Moreover, Pfizer’s willingness to pay some 60% of the consideration in cash—again, funded by the banks—is a sign of confidence in Wyeth’s valuation, a potentially beneficial signal to equity markets broadly.
But it is easy to see why the whole situation might stick in the craw of many politicians and voters, who already have shown no love for TARP. Everyone wants lending to get going again. But funding companies to then go ahead and slash high-paying jobs isn’t exactly the way the government sold the electorate on a bailout of the banking industry.
Testing times: Pfizer’s Jeffrey Kindler (left) and Bernard Poussot of Wyeth in New York. Pfizer’s takeover is predicated on massive job cuts. Mark Lennihan / AP
Pfizer’s acquisition may be distasteful; however, preventing such ironies would cause even greater economic distortions. Lending should be done for normal corporate purposes, which sometimes includes job cuts. And the fact is that pharmaceutical companies are tremendously overstaffed considering their nearing patent expirations. Firing people is no fun, but it is often a necessary side effect of capitalism. Eventually, the hope— partly dictated by experience—is that most will find jobs that benefit society equally if not more, perhaps in small biotech companies that are more productive at discovering medicines.
Pfizer agreed on Monday to pay $33 in cash and 0.985 a share of its stock for each share of Wyeth. This is a 29% premium to Wyeth’s stock on 22 January, the day before news of talks broke.