There's much concern over the hefty price that AbbVie (ABBV) has agreed to pay for struggling pharmaceutical company Allergan (AGN) -- but in the context of previous takeover attempts, AbbVie's $63 billion bid appears reasonable.
After all, Pfizer (PFE) bid an eye-popping $160 billion for Allergan in 2015 aimed at cutting its tax costs by moving its tax base to Allergan's Ireland headquarters -- a deal that eventually fell apart following U.S. government opposition. Still, that price was nearly triple what AbVie offered Tuesday for AGN.
However, Allergan's stock price has halved since the Pfizer deal fell apart in 2016 under pressure from then-President Barack Obama's administration. And as the Trump administration isn't overly friendly to mergers and acquisitions in the pharma space, government opposition isn't necessarily out of the question this time, either.
What's surprising in hindsight is that many analysts thought at the time that even Pfizer's $160 billion bid was too low given Allergan's intrinsic value.
"In the all-stock deal, AGN shareholders will receive 11.3 PFE shares, implying an AGN price of $364 a share, according to Friday's close," Sanford Bernstein analysts wrote in a note at the time. "PFE is paying about 7% less for AGN than what we had been expecting, which is a positive for PFE shareholders and somewhat of a disappointment to AGN shareholders. According to our survey, they were expecting around $390 a share."
While it's true that Teva Pharmaceuticals (TEVA) acquired Allergan's generics business for nearly $40 billion in 2016, the Pfizer deal would have still valued AGN at about two times AbbVie's latest offer even after backing out the generics business. AbbVie will only be paying $188.24 each in cash and shares for Allergan's outstanding common stock -- which is a 45% premium to AGN's Monday closing price, but still far below where Allergan was trading it as recently as the fourth quarter.
All in, it would appear that Pfizer investors dodged a bullet, as President Trump's 2017 tax cuts eroded a key thesis for the company's 2015 offer to buy AGN. Allergan's struggles since then have also drawn increasing questions as to the company's strength in the first place.
At the same time, Pfizer's loss of its record deal with Allergan didn't stop the company from making other significant pick-ups recently, like purchasing Array Biopharma and the Vivet Therapeutics' gene-therapy portfolio. In light of those accretive acquisitions, it's fair to ask what "opportunity costs" AbbVie will be paying by deciding to take over Allergan.
In that context, perhaps AbbVie stock's 14% decline so far Tuesday isn't overly surprising. What investors need to ask themselves now is whether Allergan's has fallen enough to make it an attractive target for AbbVie -- or if AGN's collapse in recent years has been well-deserved, making it a pricey laggard for AbbVie to be buying here.