Pfizer's $11 bil. premium above Pharmacia's recent stock market valuation is a figure calculated from the estimated operating savings in the companies' proposed stock-for-stock transaction.

The transaction was calculated to offer a 44% premium to Pharmacia's recent market cap and stock price during the last 30 days, adjusted for the pending Monsanto spin-off.

During a July 15 conference call, Pfizer CEO Henry McKinnell, PhD, explained the pricing of the deal in relation to the expected savings from synergies: "If you capitalize the cost savings, that about equals the premium." The cost savings are predicted to peak at $2.5 bil. three years after the closing.

McKinnell's calculation of the balancing act between savings and the premium to Pharmacia shareholders may be one of the keys to the main question raised by the deal: "Why now?"

Because of the decline in Pharmacia stock prices during 2002, Pfizer was able to work out a formula in which it could use value extracted from merger efficiencies to support an attractive premium. Pfizer's stock had also declined before the announcement of the merger, but not at as rapid a rate as Pharmacia's.

Pharmacia's stock had fallen nearly 30% from the end of the first quarter until the Friday before the announcement. Pfizer's stock price had fallen by 19%.

Selling the merger as a good deal for Pharmacia investors, McKinnell declared that Pfizer, in essence, is giving back merger savings to the Pharmacia shareholders.

However, looked at from the perspective of the 2002 poor market performance, Pfizer's offer of $45.08 in stock for each Pharmacia share serves just to bring Pharmacia shareholders back to the level of their holdings on March 31.

Pfizer also is making the offer in time to catch Pharmacia before the financial community readjusts the valuation following the latter's Monsanto spinoff.

Another "why now" answer stems from the general disarray and uncertainty surrounding a number of drug companies. With Bristol-Myers Squibb, Schering-Plough, Roche and Lilly often noted in the business pages as merger targets, Pfizer is acting peremptorily to assure that its position atop the industry remains secure.

As a move to reassert its statistical dominance, Pfizer's purchase means that the company will expand its sales leadership in pharmaceuticals by four-fold from $2.8 bil. larger than GlaxoSmithKline to almost $15 bil. larger.

After the Monsanto spin-off, Pharmacia will bring $8.3 bil. in revenue and 45,000 employees to Pfizer.

Pfizer is calculating costs from the merger at a ratio of 1.5:1 relative to savings, putting total Pharmacia costs at $3.75 bil. The costs-to-savings ratio is similar to that used in the Warner-Lambert deal, whereby Pfizer will record $2.8 bil. in costs and $1.8 bil. in savings in 2002.

Pfizer plus Pharmacia's estimated pro forma operating margins for 2002 would be 31.7% post-merger, compared to 36% with Pfizer alone. Pharmacia's operating margins were 19.3% in 2001.

The acquisition is expected to be non-dilutive in 2003 and add six cents to diluted earnings per share in 2004 (excluding changes in accounting principles, merger-related costs and other items).

The size and logic of the deal, however, did not immediately impress investors as a positive for Pfizer: the company lost $3.42 per share (10.6%) on the day the deal was announced and $5.38 (16.7%) for the week. Pfizer's $26.82 close on Friday, July 19 is a one-year nadir for the stock.

Pharmacia moved up with the bid: closing up a matching 16.7% percent and $5.40 for the week.

While Pfizer is using stock for the deal, it is also using its strong balance sheet. The company plans to accelerate a stock buyback to reduce the number of shares used in the transaction by 25%. Pfizer is expanding its share buyback program from $10 bil. to $16 bil., to be completed in 2003.

Going forward, Pfizer will report pro forma earnings after amortization of intangibles, write up of assets to fair value and a one-time charge on in-process R&D. Amortization of intangibles "will not be an insignificant number," CFO David Shedlarz said, estimating the write-down at $10 bil. over 10 years.

Pfizer $11 Bil. Premium For Pharmacia Calibrated To Merger Savings

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