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Sushin Surendran- 1564791

SUSHIN SURENDRAN
Mentor: Dr. Jaladi Santosh Rupa
ARU Student ID: 1564791
LSC Student ID : 0012FBNRRA0415

Contents
1) Introduction.................................................................................................................... 5

INTEGRATED CASE STUDY


On Pfizer and AstraZeneca Acquisition
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2) Problem Statement......................................................................................................... 6
3) Case Brief....................................................................................................................... 7
4) Problem Statement and Plan of Analysis........................................................................9
A) PESTEL ANALYSIS....................................................................................................... 11
B) SWOT Analysis........................................................................................................... 13
Strategic Management.................................................................................................... 14
C) Porters Five Forces................................................................................................ 14
D) Competitive Profile Matrix...................................................................................... 15
E)

Ansoff Matrix.......................................................................................................... 16

F)

Boston Consulting Group Matrix............................................................................. 17

G) Post Acquisition Integration Approach....................................................................19


International Business..................................................................................................... 20
H) Yips Globalization Drivers...................................................................................... 20
I)

Porters Diamond.................................................................................................... 21

J)

Modes of Market Entry........................................................................................... 22

Finance............................................................................................................................ 23
K) Valuation Models.................................................................................................... 23
L)

Capital Structure Analysis...................................................................................... 24

Research Methodology.................................................................................................... 25
A) Research Philosophy.............................................................................................. 25
B) Research Approach................................................................................................ 26
C) Data collection....................................................................................................... 26
D) Research Ethics...................................................................................................... 26
5) Problem Analysis and Solution Recommendation.........................................................26
A) PESTEL Analysis........................................................................................................ 26
B) SWOT Analysis........................................................................................................... 28
C) Porters Five Forces................................................................................................... 29
A) Threat from New Entrants...................................................................................... 29
B) Suppliers Bargaining Power.................................................................................... 29
C) Buyers Bargaining Power....................................................................................... 29
D) Rivalry of Competitors............................................................................................ 29
E) Threat of Substitutes.............................................................................................. 29
F)

Competitive Profile Matrix......................................................................................... 30

G) BCG Matrix................................................................................................................ 30
A) Cash Cows.............................................................................................................. 30
B) Stars....................................................................................................................... 31

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C) Question Mark........................................................................................................ 31
D) Dogs....................................................................................................................... 31
H) Ansoff Matrix............................................................................................................. 31
I)

Integration Approaches............................................................................................. 32
A) Preservation........................................................................................................... 32
B) Absorption.............................................................................................................. 32
C) Symbiotic............................................................................................................... 33
D) Transformation....................................................................................................... 33
E) Holding................................................................................................................... 33

J)

Strategic Reasons...................................................................................................... 33

K) Yips Drivers of Globalization..................................................................................... 34


A) Cost Drivers............................................................................................................ 34
B) Government Drivers............................................................................................... 34
L)

Porters Diamond Framework.................................................................................... 34


A) Factor Conditions.................................................................................................... 35
B) Related and Supporting Industries.........................................................................35

M)

Modes of Market Entry........................................................................................... 35

N) Discounted Cash Flow Method................................................................................... 36


O) Capital Structure Analysis......................................................................................... 39
A) Modigliani and Miller Trade-off Theory...................................................................39
B) Pecking Order Theory............................................................................................. 39
P)

Recommendations..................................................................................................... 39

Q) Limitations of the study............................................................................................. 41


6) Learning Transfer.......................................................................................................... 41
A) Company Introduction............................................................................................... 41
B) Importance of Learning Transfer................................................................................42
C) Problem 1.................................................................................................................. 42
D) Solution to Problem 1................................................................................................ 42
E) Problem 2.................................................................................................................. 42
F)

Solution to Problem 2................................................................................................ 43

7) Conclusion.................................................................................................................... 43
8) References.................................................................................................................... 44
9) Appendix...................................................................................................................... 47
Mind Map......................................................................................................................... 47
ARU Research Ethics Form............................................................................................... 48

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1) Introduction
The Global pharmaceutical industry has been one of the most consistent performing industries. The
innovations happening in the industry has paved the way for the industry to grow at a consistent pace.
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According to Arnum (2015), the annual compounded growth rate is expected to increase at the rate of 47% to 2018, with the global Pharma sales to reach $1.3 Trillion by 2018. Pfizer (US), Novartis
(Switzerland), Johnson & Johnson (US), Roche (Switzerland), GlaxoSmithKline (UK), AstraZeneca
(UK), Sun Pharmaceuticals (India) are some of the top leading companies in the industry presently
(Chen, 2015).
The Pharmaceutical industry in the UK is the countrys major agents of research and innovation. The
industry has spent about 4.2 Billion on R&D in 2012 (Monaghan, 2014). The pharmaceutical industry
in the UK has accounted for 0.8% of the GVA (Gross Value Added) which is thrice more than textile,
clothing and footwear industry and a revenue of 13.3 Billion in 2013 (Martin, 2014). The industry also
has a reputation of providing higher number of employment opportunities as well as high pay. The
industry employed 73,000 workers in the year 2012 (Martin, 2014). The trade balance in
pharmaceuticals has been positive which means that the countrys exports in pharmaceuticals were
higher than its imports in pharmaceuticals. The trade balance figure stood at $4.6 Billion in the year
2013(Monaghan, 2014).

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(Source: IMC)
Pfizer, one among the largest pharmaceutical companies globally, with its headquarters in New York
City, USA has always been a company that has grown through acquisitions. This strategy has helped
them to grow substantially to become the largest in 2013. The company has acquired various companies
like Warner-Lambert, Pharmacia and Wyeth throughout the years. The company has decided to follow
the same path when they decided to acquire the UK based pharmaceutical company AstraZeneca which
is the 6th largest globally and the second largest in the UK. Even though the attempt was made by Pfizer,
AstraZeneca completely rejected the offer made by Pfizer on multiple occasions.
As a strategic consultant, the author will try to prepare a report based on the case of the acquisition
attempt made by Pfizer to acquire AstraZeneca. This report will analyze the various reasons as to why
the acquisition attempt was made by Pfizer, by analyzing their internal and external environments along
with various other models that will provide an insight in to the company and come up with reasons.
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Various problems popped up during the analysis of the case study, this report will analyze those
problems that resulted in the rejection of the offer by AstraZeneca. Various models and theories will be
made use to come up with solutions that will result in rectifying the problems that caused the rejection of
the attempt.

2) Problem Statement
The decision made by Pfizer to go for acquiring AstraZeneca will create a huge impact in the industry as
the end result of the acquisition will be the largest pharmaceutical company. The acquisition would have
created potential benefits for Pfizer. The expiry of Pfizers patent of certain blockbuster drugs created a
dent in the position of Pfizer as this could have resulted in them losing competitive advantage, along
with its delay in research and development of new drugs was also disturbing Pfizer. According to
AstraZeneca the acquisition would have caused disruptions, which was a major reason for them to reject
the offer. The offer proposed by Pfizer was undervalued as per AstraZeneca which resulted in the
rejection of the offer. The offer by Pfizer also had too much of Pfizer stock that was a risk for the
shareholders of AstraZeneca. One of the drivers for Pfizer to go for the acquisition was to save costs,
and AstraZeneca believed this could well lead to delay in the development of drugs which was another
challenge for the acquisition. The proposal by labor party to amend anti-takeover regulation will have
potential impact on Pfizer if they decide to go with the deal after cool off time period.

Research Question (s)


1)
2)
3)
4)
5)
6)
7)

What are the drivers of Internationalization for Pfizer?


What was mode of entry for Pfizer in to the UK market?
What is the competitive position of Pfizer in the industry?
What are the strategic reasons for Pfizer to acquire AstraZeneca?
What will be the post-acquisition integration approach of Pfizer?
Was AstraZeneca right to reject Pfizers offer of 50 per share?
What will be the impact of the acquisition on the capital structure of Pfizer?

Research Aim and Objectives


Aim
The analysis of the case study is aimed at understanding the issues that made Pfizer to acquire
AstraZeneca and the issues that led to the rejection of acquisition attempt. Moreover come up with
recommendations to solve the problems that resulted in the rejection of offer.
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Objectives
1) To critically analyze the drivers of Internationalization for Pfizer.
2) To critically analyze various modes of entry for Pfizer to enter in to the UK market.
3) To critically analyze the competitive profile of Pfizer and strategic reasons for them to acquire
AstraZeneca.
4) To critically analyze potential post acquisition integration approaches for Pfizer.
5) To critically examine AstraZenecas decision to reject the final offer of 50 per share from Pfizer.
6) To critically analyze the impact of proposed acquisition on the capital structure of Pfizer.

3) Case Brief
Harvard Business School case Pfizer and AstraZeneca: Marketing an Acquisition (A) written by John
A. Quelch and James Webber is the case that will be analyzed as a part of the Integrated case study
project. The case is on the backdrop of the acquisition proposal made by Pfizer to acquire AstraZeneca.
The case discuses various reasons why Pfizer wanted to acquire AstraZeneca as well as the challenges
that Pfizer faced and reasons of AstraZeneca for rejecting the offer. This section will give a brief
description of the case study.
The Pharmaceutical industry in the UK is the countrys major agents of research and innovation. The
industry spends about 4.2 Billion on R&D in 2012 (Monaghan, 2014). The health spending in the UK
accounted for 9.4% of the GDP. The industry also has a reputation of providing higher number of
employment opportunities as well as high pay as well. The industry employed 73,000 workers in the
year 2012. The trade balance in pharmaceuticals has been positive which means that the countrys
exports in pharmaceuticals were higher than its imports in pharmaceuticals. The trade balance figure
stood at $4.6 Billion in the year 2013. The Government has also stepped in big time to provide the
impetus to the industry by making various investments including helping universities and small sized
business to conduct research.

Pfizer
Pfizer became the top pharmaceutical company in the globe with revenue of $52 billion and Market
capitalization of $192 billion. Pfizer has been the pioneer in the development of blockbuster drugs like
Penicillin, Celebrex, EpiPen, Lipitor, Viagra and Zoloft. The company describes itself as a researchbased, global pharmaceutical company.

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Pfizer has been one such company that has grown themselves through acquisitions. The company was
involved in some of the biggest acquisitions which helped them in becoming the largest pharmaceutical
company globally. Pfizer acquired Warner-Lambert in 2000 for $93.4 Billion which made them the
largest pharmaceutical company. In 2003, Pfizer acquired Pharmacia for $60 billion and again in 2009,
they acquired Wyeth for $68 Billion. The current CEO of the company Ian Read is instrumental in the
decision making process of the company, he shortly after becoming the CEO announced various cost
cutting measures including cutting R&D spending by $2 billion in 2012.

AstraZeneca
AstraZeneca is the second largest company in the UK pharmaceutical industry behind GlaxoSmithKline
and the sixth largest among the Global pharmaceutical industry players with revenue of $25.7 billion
and $89.5 billion market capitalization.
AstraZeneca also followed the same footsteps of Pfizer as far as the strategy of growing is considered.
AstraZeneca was also involved in various acquisitions, with the largest being the acquisition of
MedImmune in the year 2007 for $16 Billion. The current CEO of the company Pascal Soriot has been
seen to be someone who is in to future, as after becoming the CEO he has made decisions that will be
instrumental in the growth of the company.

Proposed Merger
Ian Read, CEO of Pfizer contacted Leif Johansson privately on November 25, 2013 to talk about the
possibility of an acquisition. On January 5, 2014, an offer of 46.61 per share was offered to
AstraZeneca, but they rejected stating the offer undervalued their pipeline and the offer did not include
enough cash. Pfizer went public with their interest on 28th April, 2014, when they announced their
interest in AstraZeneca publicly, that resulted in an increase in the stock price of both companies. Pfizer
made their last offer of 50 per share on 2nd May, 2014, which was also rejected by AstraZeneca. The
rationale for the acquisition was criticized by many.
The Government was initially in favour of the deal, but later showed skepticism over the deal as the deal
would have had negative impact on jobs and the sector. Labour Party, the opposition party was also
against the deal as they felt the deal was meant for saving their tax by changing their domicile and also
the commitment made by Pfizer was pretty weak and paper thin.
The main criticism of the attempt was that the main driver for Pfizer to acquire AstraZeneca was to save
on taxes by moving their domicile in to the UK from the US. Even though Ian Read maintained that this
was not their main motivator, many were not ready to believe that. According to various editorials
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published globally, there were no positive talk regarding the attempt made by Pfizer, instead the
emphasis was on the negative impacts that the deal would have had.

4) Problem Statement and Plan of


Analysis
The acquisition attempt made by Pfizer had faced a lot of problems which ultimately led to the rejection
of multiple offers made by Pfizer from the part of AstraZeneca. The problems can be systematically
divided in to three different business disciplines.

Strategic Management
International Business
Finance
Strategic Management
The decision to acquire a firm from part of a company is in itself a part of the discipline of strategic
management. The given case also has certain problems that can be categorized in to Strategic
management discipline.
Pfizer in the recent times faced difficulty in maintain their competitive advantage mainly due to the
expiry of their particular patented blockbuster drugs along with the delay in the research and
development of new drugs from part of the company. Thus, Pfizer will have to understand their present
competitive position to make strategies to hold on to their competitive position in the industry and
probably this was one of the reasons for them to go for the acquisition as well. AstraZeneca, the target
company said that the acquisition would have led to disruptions which were one of the reasons for them
to reject the offer. Pfizer should make decision on their post acquisition integration approach to
overcome the potential disruptions of the acquisition.
International Business

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The particular attempt to acquire AstraZeneca was made by Pfizer to save on their costs and it was one
of their main drivers. An impression was created that the main driver for the acquisition attempt was cost
driver and this was a pivotal reason for AstraZeneca to reject the offer as they believed this will have
bought delays in the development of new drugs. It is very essential for Pfizer to understand their various
drivers for acquiring AstraZeneca to change the perception and overcome this issue. The opposition
party in the UK, labour party proposed the government to make amendments to anti takeover regulations
present in the country and this could have potential impact on Pfizer if they decide to go for the deal
once again after the cooling off period of six months from the date of rejection. Pfizer will have to
consider different types of modes of entry in to the UK market if the amendment is made and choose the
one that is best in their interests.
Finance
AstraZeneca right from the start maintained that the offer made by Pfizer has particularly undervalued
their pipeline and was one of the reasons for them to reject the offer. The fair value of AstraZeneca has
to be found out to compare the offer and the real value of the company to decide if the offer was really
undervalued. AstraZeneca also maintained that the offer made by Pfizer had too much stock of Pfizer
that could be a risk for the shareholders of AstraZeneca. The different option of sources of finance for
Pfizer for the acquisition has to be looked upon to understand the impact of the deal on the capital
structure of Pfizer, so as to see if having much stock of Pfizer is actually good or bad for the
shareholders of AstraZeneca.

A plan of the case study analysis including various models that will be covered under different
disciplines is in the figure below:

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Situation Analysis
SWOT

PESTEL

Porter's Five
forces

Strategic Management

Competitive
Profile Matrix

BCG Matrix

Ansoff Matrix

Post Acquisition
Integration
Approach

International Business
Yip's Globalisation Drivers

Porter's Diamond

Modes of Market Entry

Discounted Cash Flow Method

Modigliani and Miller Theories

Finance

Pecking Order Theory

A) PESTEL ANALYSIS
PESTEL analysis is one of the most extensively used tool by companies to gain an understanding of the
exterior environment of a business. The framework mainly covers six different factors that will have
potential impact on the business and the six factors are political, economical, social, technological,
environmental and legal factors (Neild and Carysforth, 2004).

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According to Neild and Carysforth (2004), a comprehensive outlook of a market can be understood from
PESTEL analysis, which is extremely useful for companies to customize and develop strategies to suit
that particular market.

Political

Legal

Economical

PESTEL
Social/
Cultural

Environmental

Technological

Rationale for choosing the model


The fundamental basis of conducting PESTEL analysis is to analyze and point out factors that will have
either positive or negative impact on the functioning of the company. The impacts identified will help
the company in their decision making.
PESTEL analysis will be quite useful while carrying out SWOT analysis, as the various factors
considered during PESTEL analysis can also be considered during the analysis of opportunities or
threats in the SWOT analysis.
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B) SWOT Analysis
SWOT, one of the most significant tools made use of by organizations to analyze both their internal as
well as external environments. There are four factors that are being considered during SWOT analysis
which are strengths, weaknesses, opportunities and threats, out of which the first two are internal to the
organization and the latter two, are external to the organization (Office and Webster, 2010).

Strengths

Threats

SWOT

Weakenesses

Opportunities

Strengths: Office and Webster (2010) argues that strengths are the positive elements that are internal to
the company. Strengths of a company can be tangible as well as intangible, brand image can be
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considered as strength but it is intangible. Strengths are one such factor in SWOT that is under the
organizations control.
Weaknesses: According to Office and Webster (2010) Weaknesses can be considered as the negative
elements that are internal to the company. Weaknesses like strengths can be both tangible as well as
intangible, like in the case of image if a company has bad brand image then its a weakness. Weaknesses
can put the company at disadvantage against competitors. Weaknesses can as well cause severe damage
to the value the organization.
Opportunities: Opportunities are factors that are exterior to the organization. It is the opportunities that
the organization looks to exploit and grow. Opportunities can be considered as positive elements that are
external to the organization (Office and Webster, 2010). .
Threats: Threats are factors that are exterior to the organization, which depicts the risks faced by the
organization. Thus opportunities can be considered as negative elements that are external to the
organization (Office and Webster, 2010).

Rationale for choosing the model


SWOT analysis provides the organization with a comprehensive view of the organization as it takes in to
account both the external as well as internal environment of the organization and this helps the
organization in position them better compared to their competitors.
SWOT analysis provides the organization with information regarding the opportunities that they have
along with risks that they are facing. This helps the company to make necessary changes to adapt
themselves with changes that are happening around them.

Strategic Management
C)

Porters Five Forces

Michael E Porter from Harvard University, in the year 1979 introduced a business model that looked at
the competition level happening in an industry which also helps in formulating strategies that outclass
the competitors. The model aids the companies in looking at the attractiveness of an industry, which
would help them in making decisions on whether to enter that particular industry or not (Botten, 2009).
The model introduced by Porter, considers five forces that will have an impact on the industry. Those
five forces are illustrated below:

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Competitive Rivalry

Threat of New
Entrants

Threat of Substitutes

Porter's
Five Forces

Bargaining Power
of Suppliers

Bargaining Power
of Buyers

Rationale for choosing the model


Porters five forces model provides a comprehensive outlook of the competitiveness of an industry as it
considers five different forces that could potentially have an impact on the industry either positively or
negatively. This provides an organization with relevant information as if whether industry is good for
them to enter or not.
The model looks at the attractiveness of an industry and an unattractive industry means it would impact
negatively on the companys performance.

D) Competitive Profile Matrix


A powerful strategic management tool that aids in comparing the major players in the industry.
Competitive profile matrix clearly indicates the strength and weaknesses of a company. Various critical
success factors of an industry are considered and a comparison is done between the companies on these

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factors and they are measured on a weighted rating system. Each critical success factors are given their
weight on the basis of their importance (Jacob, 2015).
According to Jacob (2015), the analysis of CPM matrix will help an organization in understanding
where are they presently in comparison with their rivals on various critical success factors and this will
aid them in understanding the areas where they need to make improvements and also the areas where
they are strong which will help them to protect those areas for their advantage.

Rational for choosing the model


Competitive profile matrix helps a company in understanding their relative strengths and weaknesses,
which will help the company in making strategic decisions to grow. The matrix will also aid the
company in knowing the strengths and weaknesses of their rival as well, which will aid them to exploit
their weaknesses to gain advantage over them.
The matrix considers various critical success factors of the industry, which means the matrix provides a
deep analysis of both the internal as well as the external environment of the company.

E)

Ansoff Matrix

H. Igor Ansoff, the father of strategic management, in 1957 in the Harvard Business Review, came out
with a model that portrays different corporate growth strategies for an organization. Since then the
model has been widely used by organizations to devise strategies for growth (Proctor, 2000).
Ansoff matrix considers four alternative strategies for growth, that an organization can make use of. The
matrix focuses on the two dimensions of products and markets. The matrix also aids the organization in
understanding various risks that are associated with the strategies as well (Proctor, 2000). The four
different strategies are illustrated below:

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PRODUCTS

MARKETS

Existing

New

Market Penetration

Product Development

Diversification

Existing

Market
Development

Rational for choosing the model


New

Ansoff matrix aids the organization in designing strategies for the organization to grow. The growth
strategies in the matrix are on the combination of Product-Market. When a company moves from one
quadrant to another quadrant either vertically or horizontally, the level of risk associated also increases.
The risks that are associated with each strategy can be analyzed and the organization will be able to
choose the one that matches with their risk taking culture.

F)

Boston Consulting Group Matrix

In the early 1970s, a model was developed by Bruce Henderson of Boston Consulting Group intended to
help in the planning of different portfolios of an organization. The matrix has got two determinants,
market share and market growth. Market share is a depiction of competitive advantage while market
growth is a depiction of industry attractiveness (Proctor, 2000). The matrix divides business units in to
four different quadrants on the basis of the above mentioned two determinants.
The matrix assumes that the result of increase in market share will be increased cash generation and
increase in market growth is increase in usage of cash. Thus the position of a business unit of an
organization indicates its cash generation and cash usage (Proctor, 2000). The four quadrants are
illustrated below:

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Relative Market Share


LOW

Stars

Question Mark

Cash Cows

Dogs

HIGH

Market Growth Rate

HIGH

LOW

Rationale for choosing the model


Boston Consulting Group matrix indicates the relative position of different business units of a company
on the basis of the two determinants which are market share and market growth. This will help the
company in gaining an understanding of their business units and generating profits and which are not
generating profits. This will help the company in making decisions on either how to make the ones
making losses to generate profit or to completely stop the functioning of the business units. It will also
help in the resource allocation to different business units especially cash.

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G) Post Acquisition Integration Approach


Acquisition is a quite popular strategy made use of by organizations to grow. Acquisitions help the
organizations to reach new markets, gain more knowledge and introduce new products which will give
the organizations a sustainable competitive advantage over its competitors. But if the acquisition has to
be successful then there should be a good level of integration mainly because of the fact that the two
companies that are merging previously had their own culture (Savovic, 2012). Integration is utmost
necessary to create value and ultimately achieve the goals of the acquisition.
According to Ellis and Lamont (2004), the integration approach that a company should take must take in
to account two criteria: strategic interdependence and organizational autonomy. There are mainly five
different approaches for integration. Each approach has its own benefits. The ideal approach for
integration will be different for different companies. The five types of integration approach are
illustrated below:

Preservation

Holding

Symbiotic

Integration
Approach

Absorption

Transformation

Rationale for choosing the model

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Integration is an important aspect of acquisitions as it involves the coming together of two different
companies and it is necessary that the two integrates together to create values. The different integration
approaches will help in understanding different ways of integrating and the company will able to choose
the one that suits them the best. This will also help in reducing the disruptions that the acquisition might
cause.

International Business
H) Yips Globalization Drivers
George S. Yip in 1992 introduced a framework that looked at the globalization potential of an industry
known as Yips Globalization Drivers. The framework then onwards has been one of the most widely
used frameworks in looking at the attractiveness of an industry in the context of globalization potential.
Yip argued that not all industries have the same globalization potential and they attract more global
players compared to other industries (Stonehouse and Houston, 2003). The drivers of globalization can
be categorized in to four different categories and they are illustrated below:

Cost

Competition

Yip's
Globalisation
Drivers

Market

Government

Rationale for choosing the model


Yips Globalization Drivers framework will provide a comprehensive view of the potential of an
industry to be global. The drivers that are categorized in to four different categories will aid in
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understanding the factors that are attracting global players towards the industry which will aid in
underlining the reasons for choosing to enter a particular industry.

I)

Porters Diamond

Michael E. Porter introduced a new economic model in his book The Competitive Advantage of
Nations called the Diamond model which aids in understanding the competitive position of a nation in
the global scenario. Michael Porter argued that a nation can have competitive advantage over the nations
(Stonehouse and Houston, 2003). He introduced four factors that are considered to provide the nation
with a competitive advantage and they are illustrated below:

Firm Strategy, Structure and


Rivalry

Demand Conditions

Factor Conditions

Related and Supporting Industries

Rationale for choosing the model


The model introduced by Michael E. Porter provides insight in to different advanced factors that
provides the nation with a competitive advantage in the global platform. By analyzing these factors an
organization will get information that could possibly attract them to that particular nation, as those
factors will give the organization with either the resources or support that they lack in their own country.
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J)

Modes of Market Entry

In the present world of Globalization, it is imperative that an organization aiming for growth goes
international. Most of the high selling and successful organizations have their footprints in various parts
of the world. This not only helps the organization to grow in size but also helps in spreading the risk.
There are various reasons for a company to go global like not enough demand in their home country,
increase in production costs or government policies (John and Gillies, 1996). According to John and
Gillies (1996), the most crucial decision that the organization needs to make is the selection of the mode
of entry in to the market. The apt mode of entry will depend on the organization and the environment of
the market they are aiming to enter.
There are various modes of entry and they are illustrated below:

Acquisition
Contract
Manufacturing

Greenfield
Investment

Modes of
Entry

Wholly
Owned
Subsidiary

Exporting

Management
Contract

Licensing
Foreign
Direct
Investment

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Rationale for choosing the model
A company in the present world, which aims to grow, has to go international and for every country there
will be a particular mode of entry that will be the best option to enter the market. So for a company they
should analyze the different modes of entry and have to choose one which will allow them to perform to
their full potential in that market. Thus it is important to understand various modes of entry which will
help the company in choosing one that suits the market the best.

Finance
K)

Valuation Models

The value of an organization is always something that has been keenly watched by the outside world
especially in the case of big organizations. The topic of an organizations value comes in to discussion
especially when another organization is looking for a merger or acquisition. It is important to know the
right value of an organization especially in the case of acquisition because if the correct value is not
found out then the offer could either be undervalued or overvalued and both are not good for the deal
(Kruschwitz and Loffler, 2006).
There are various valuation models to find out the value of an organization and one of the main
valuation models is in the illustration below:

Discounted Cash Flow


Method

Valuation Model
Discounted Cash Flow Method

DCF method of valuation is quite widely used model to find out how much an organization is worth.
The main and primary idea behind this model is that the worth of an organizations stock is the present
value of all the estimated cash flows in future. According to the model the greatest impact on share
valuation is caused by the changes in the long-term growth rates (Kruschwitz and Loffler, 2006).

Rationale for choosing the model


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The above mentioned model provides an insight in to the real worth of a company and this is quite
essential especially in the case of acquisitions to know if the offer made by the acquiring company to the
target company is undervalued or overvalued. An undervalued offer could result in the rejection of the
offer and an overvalued offer will not be good for the acquiring company as they are spending more on
something that is worth less.

L)

Capital Structure Analysis

According to Agarwal (2013), Capital Structure of an organization is something that needs to be looked
at closely as analysis of capital structure will provide a clear indication of the financial health of an
organization. Capital structure simply put is the debt-equity relationship. Capital structure decision
mainly is the decision making of what source of finance should be used for a particular investment.
There are various kinds of sources of finance like equity, debt, and retained earnings (Agarwal, 2013).
Certain factors have huge influence on an organizations capital structure decisions and they are
illustrated below:

Business Risk

Market
Conditions

Organization's
Tax Exposure

Factors

Financial
Flexibility

Growth Rate

Management
Style

[25]

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Capital Structure decision making is a crucial decision for an organization to make as this could have
long-term impact on the organization and making a bad decision could lead to catastrophe at times as
well. There are various capital structure theories but the two most popular theories are Capital structure
theory proposed by Modigliani and Miller and Pecking Order theory.

A)Modigliani and Millers Capital Structure Theories


In the 1950s, two professors conducted a deep study in to capital structure and they developed two
theories of capital structure called as Theory of Irrelevance Proposition and Tradeoff Theory of
Leverage.
The theory of irrelevance proposition assumes that there will be zero taxes and zero bankruptcy costs
and in this condition the WACC should remain constant at the time of changes in the capital structure of
the organization which means that under these conditions the value of the company is not impacted by
the capital structure (Danthine and Donaldson, 2005). The trade-off theory overturns the assumptions
and as per the theory debt is the cheaper form of finance compared to equity as there is no kind of risk
sharing unlike equity which is a residual claim. According to Danthine and Donaldson (2005), as per
the theory an organization should create a balance between the benefit got by lower WACC against the
increase in financial risk and the theory identifies the optimal debt to equity ratio as the measure in
which the two balances out each other.

B)Pecking Order Theory


In 1961, a theory was suggested by Donaldson which was modified after some years by Stewart C.
Meyers and Nicola Majiluf in 1984 called pecking order theory. The theory states that an organization
should finance them first by their retained earnings and if retained earnings are not there then the
organization can go for debt and equity should be considered as a source of finance only at the last
(Danthine and Donaldson, 2005).

Rationale for choosing the models


Capital structure decisions are quite vital for the organization, as this decision will potentially impact all
the stakeholders of the organization. The decision made will have a long lasting impact on the
organization as it is quite difficult to overturn the decision once implemented. The theories of
Modigliani and Miller and Pecking Order provide an insight in to the impact of each source of finance.
The model also talks about the best source of finance that an organization should make use for
investment. The models will help in recommending the best source of finance for the organization to go
for acquisition.

Research Methodology
According to Stake (2013), case study analysis is a method in which the study of a case is done by
making use of data that are available and come up with best solution to the issues. Secondary data is
only considered in the analysis and no primary data is collected.

A)

Research Philosophy

According to Novikov and Novikov (2013), research philosophies are a guiding path for the researchers
on how to handle the research. There are mainly two leading research philosophies, Positivism and
Interpretivism.
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This particular case study analysis is guided by applying positivism research philosophy. This research
philosophy is chosen as the analysis is done using secondary data.

B)

Research Approach

The research approaches are mainly of two types, naming Deductive and Inductive approach. In
deductive approach, the research is done using existing studies and theories, but in inductive approach
new theories are built through either observation or experimentation (Novikov and Novikov, 2013).
In this case study analysis, deductive approach is made use of by the researcher.

C)

Data collection

Secondary Data Collection


The case study analysis is done by the researcher by making use of secondary data, which means the
data that is already available is made use of to conduct the research. The data from the provided case
study, other relevant sources are made use of by the researcher.

D)

Research Ethics

Ethical issues arise in a research mainly when the data collection is primary data collection. Since there
is no primary data being made use of for the case study analysis, the chances of ethical issues dont
arise. Even though there are no ethical issues, there is an issue of plagiarism as the data used is
secondary. Harvard referencing style is used to give references when the work of another researcher is
used.

5) Problem Analysis and Solution


Recommendation
A) PESTEL Analysis

Political

[27]

UK is one of the most powerful members


of the European Union with a powerful
democratic structure.
The government is a stable one and under
the leadership of the present Prime
Minister David Cameron, there is a sense
of effective governance.
The government support for the
pharmaceutical industry has grown
through the years (Landale, 2010).
The corporate tax rate in the UK is quite
less compared to other countries like USA
and it stands at 21%.
The government policies are more
business friendly with positive economic
policies (Landale, 2010).

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Economic

Social

Technological

[28]

The GDP of UK was worth $2988.99


Billion in 2014 and it represents 4.82% of
the Worlds total GDP value.
The economy of the UK is a highly
developed economy with an investment
friendly weather (Elliott, 2016).
The disposable income per head in 2013
was 22,516 according to Office for
National Statistics (Andalo, 2013).
The UK is the seventh best country to do
business in the World as per World Banks
Doing Business indicator (Elliott, 2016).
The environment of the UK is favourable
in the case of availability of skilled
labours.
The population growth rate of the UK was
0.6% in 2013, with more than 10Million
people above the age of 65 years (Andalo,
2013).
The education and healthcare system in
the UK are ranked one among the finest in
the world (Coughlan, 2014).
The strong education system led to a pool
of highly skilled workers in the UK
(Coughlan, 2014).
The public expenditure of the UK in
healthcare has always been quite high.
The people belonging to the European
Economic area are also eligible for
registering to NHS.
The UK has got a strong IT infrastructure
which is vital for Pharmaceutical industry
(Ogunshakin, 2013).
The UK has got quality R&D facilities and
is strong in science and innovation.
The UK has got strong technological
infrastructure throughout the country like
in electricity, communication
(Ogunshakin, 2013).
2 Billion is spent on R&D in the UK
pharmaceutical industry which is more
than any other industry in the country.

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Environmental

Legal

The UK is a member of the G8, so is a


significant player in the effort towards
environment protection.
The UK has got a good track record in
implementing policies related to
environmental protection and so the
companies in the countries will have to
compile with those policies.
The pollution levels especially the air
pollution level seems to be going high
(Kirkwood, 2014).
The UK has got transparent and efficient
legal system that ensure business freedom
for organizations (Chafuen, 2014).
The laws are made in the UK by keeping
all the stakeholders in mind which makes
it more conducive to business.
The UK has got a strong law structure like
labour law, environmental acts which need
to be followed (Chafuen, 2014).
The UK ranks 21among 185 countries in
terms of enforcement of contracts
according to World Banks Doing
Business indicator (Elliott, 2016).

B) SWOT Analysis
Strengths

Weaknesses

Opportunities

[29]

Excellent brand image.


Efficient sales and marketing structure.
Patented blockbuster drugs.
Efficient R&D department.
Financial stability.
Expiry of certain patented drugs.
Low penetration in biological markets.
Legal issues in different countries.
Politics inside the company.
Co-marketing could limit the presence
globally.
Technological advancements happening
in the sector.
Expanding biological markets.
Chronic diseases are seemed to be on a
rise (Tavernise, 2014).

Sushin Surendran- 1564791

Threats

Life expectancy is showing an


increasing trend (Naik, 2014).
Vaccines- many conditions still exist
that need to be eradicated (Lorenzetti,
2015).
Higher tax rate especially in US.
Increased competition.
Regulatory concerns.
Settlement of lawsuits related to
patents.
Regional threats posed by Pharmerging
markets like India and China
(Lorenzetti, 2015).

C) Porters Five Forces


A)

Threat from New Entrants

The industry of pharmaceuticals is one such industry in which for a new company to enter will require a
huge amount of investment. The huge capital required makes it difficult for fresh companies to get in to
the industry. Also the fact that most of the existing companies in the industry are there in the industry for
many years and are well established in the market, makes taking on them a huge challenge for a new
company. So, the threat of new entrants is low as far as Pfizer is concerned.

B)

Suppliers Bargaining Power

The power for suppliers to bargain is low mainly because of the fact that there are many other suppliers
available from whom the companies can collect their materials, so if the supplier tries to bargain with
the company, then the company can move on to another supplier for the material. Another thing is that
the companies order for large quantities and as a result suppliers wouldnt be able bargain much with the
companies. So, the suppliers bargaining power is low as far as Pfizer is concerned.

C)

Buyers Bargaining Power

The companies in the pharmaceutical industries has got patent for their drugs and as a result the buyers
will not be able to put pressure on the companies to reduce the prices of the drugs as the buyers are left
with no other option other than to buy the drugs from the same manufacturer. So, the buyers bargaining
power is low as far as Pfizer is concerned.

D)

Rivalry of Competitors

Pharmaceutical industry is one industry with high level of competition happening, with many big
players trying to achieve competitive advantage over one another using various techniques like cost
reduction. The rivalry of competitors is high as far as Pfizer is concerned.

E)

Threat of Substitutes

The threat of substitutes is generally high especially in the generic medicines because of the cost related
advantages that one organization has over another company and also the present culture of people
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Sushin Surendran- 1564791


moving in to healthy lifestyle can also be a substitute in the case of generic medicines. Since Pfizer is a
big player in generic medicines, threat of substitutes is medium as far as Pfizer is concerned.

F)

Competitive Profile Matrix


Pfizer

Novartis

Teva

Critical Success Factors

Weightage

Rating

Score

Rating

Score

Ratin
g

Score

Innovation

0.15

0.45

0.60

0.30

HR Management

0.10

0.20

0.40

0.30

Asset Utilization

0.05

0.15

0.15

0.20

Leadership

0.15

0.45

0.45

0.30

Financial Strength

0.10

0.30

0.40

0.20

Product Satisfaction

0.10

0.40

0.40

0.30

Resource Management

0.10

0.30

0.30

0.20

Quality Management

0.15

0.45

0.60

0.60

Long-term Investments

0.10

0.20

0.20

0.20

Total

2.90

3.50

2.60

The Competitive Profile Matrix analysis indicates that Pfizer lags behind Novartis in various critical
factors especially in HR management and Quality management. On total Novartis scored 3.50 while
Pfizer scored 2.90 and Teva was only able to score 2.60. This indicates that Pfizer will have to make
improvements in order to stay competitive in the industry, especially improvements in factors where
they are behind like HR management and Long-term investments.

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G)

BCG Matrix

A)

Cash Cows

Cash Cows is the first quadrant of the BCG matrix that will be looked at, cash cows are those products
that has got high market share with low market growth rate. Pfizer has got few products that could come
up in this quadrant. Prevnar 13, a vaccine developed by Pfizer is the first one that belongs to cash cows;
they were the first vaccine which could prevent 13 pneumococcal strains (Lorenzetti, 2015). This
vaccine generated revenue of $4.2 Billion in the year 2012 (Lorenzetti, 2015). Enbrel, which cures
rheumatoid arthritis, is the second one that can be considered as a cash cow. The promotion agreement
between Pfizer and Amgen got expired in 2012 and as a result Pfizer will only be receiving royalty for
2.5 years, even though they still produce huge revenue with low growth rate, so it can be considered as
cash cow (Lorenzetti, 2015).

B)

Stars

Stars are the second quadrant, and the products in this quadrant have got high market share as well as
high growth rate. Lyrica, Inylta, Xalkori have generated $397 Million dollars in revenue for Pfizer in
2012, these three can be considered as stars for Pfizer (Roland, 2015). These three are developed to treat
different health issues, so it is likely that they will generate high revenue in the future as well. Since
there is no surety that all the products that pass through FDA approvals will become a star for them, the
company should continue to acquire patents as well as improve R&D to improve the chances of making
products a star. Sutent is another product that falls under stars; the medicine is for the treatment of renal
cell carcinoma and other tumors (Reingold, 2014). The patent will expire by 2018, but still with the high
revenue that they generate they can be considered as star.

C)

Question Mark

Question mark is the third quadrant in which there is a high market growth rate but low market share.
These are the products that generally have the capability to become stars. As far as Pfizer is concerned
items belonging to their consumer product portfolio falls in to this (Reingold, 2014). Nexium OTC and
Centrum are two of those that fit in to this quadrant. Even they did well for Pfizer; there is still an
amount of uncertainty about their future (Ronald, 2015).

D)

Dogs

Dogs is the fourth quadrant in the matrix, these are products that has got low growth rate and low market
share. Lipitor is one such product which even though still produces revenue of $2Billion falls in to this
category as their sales shown a steep decline of 41% in 2013 compared to 2012 (Lorenzetti,2015).
Detrol and Detrol LA, are another products that comes under this quadrant, these products have lost their
exclusivity which resulted in a steep decline in their revenues. The patent for Viagra is going to expire
soon and even though they generated high revenue for many years. The end of exclusivity has made
Viagra a less attractive one for Pfizer and also the release of new drugs like Cialis has lowered their
potential to generate revenue as well (Reingold, 2014).

H)

Ansoff Matrix

In this part the changes that have happened to the portfolio of the Pfizer ending 2013 will be discussed
in the illustration below:
[32]

Sushin Surendran- 1564791


PRODUCTS

MARKETS

Existing

New

Market Penetration

Product Development

Wyeth acquisition.
Ferrosan, FoldRx and

AstraZeneca and

King acquisition.
Alacer Corporation
acquisition (Tirrell,

2014).

NextWave acquisition.
License agreements with
GlycoMimetics (Tirrell,

2014).
Market Development

Existing

Diversification

Indulging in licensing

Joined hands with Private

agreements with three

Access to create first online

Indian firms.
Acquired 40% stake in

community to promote

Brazilian based

trials.

recruitment in to clinical

Laboratorio Teuto
Brasileiro SA (Ward and
Massoudi, 2014).
These are the potential changes that has happened to Pfizer in the five years ending 2013 that is
applicable to the framework of Ansoff Matrix.
New

Pfizer through the acquisition will be able to get hold of new products like products related to oncology
as AstraZeneca is working on developing oncology drugs. This will belong to the Product Development
quadrant of the matrix. Pfizer will also get hold of various products which is also in the same range of
their products as both will cure the same diseases, and this will be part of the Market Penetration
quadrant of the matrix.

I) Integration Approaches
A)

Preservation

The first integration approach is integration by preservation. This approach is recommended in the case
of higher requirement for organizational autonomy and lower requirement for strategic interdependence.
In this approach the target organization is allowed to function on its own after the acquisition (Ellis and
Lamont, 2004). The level of change in both the organizations is low in this approach as a primary driver
of the acquisition is to keep the strategic capabilities of the target organization unimpaired. Providing
autonomy and decision making power to target organization is vital in this approach (Savovic, 2012).

[33]

Sushin Surendran- 1564791

B)

Absorption

The second among the integration approaches is the integration by absorption. This approach is
recommended when there is a higher need of strategic interdependence for both the organizations and
the lower need for organizational autonomy (Savovic, 2012). Consolidation of primary activities of the
both the organizations by incorporating the target organizations culture and operations is the primary
aim of this approach, as this approach demands a certain amount of change in the target organization. In
order to reduce the disruptions and ambiguity surrounding it, there is a necessity to move in a fast and
consistent manner (Savovic, 2012).

C)

Symbiotic

The third integration approach is symbiotic integration. According to Ellis and Lamont (2004), this
integration approach is made use of in situations when there is an equal need of strategic
interdependence and organizational autonomy. This approach in the initial stages involves a bit of
preservation approach and later the best practices in both the firms are incorporated. There will be a
certain level of change in both the organizations in this approach as the attempt is to incorporate the core
competencies and best practices of both organizations (Ellis and Lamont, 2004). There is a need to
coexist in this approach and as a result an environment should be created of cooperation between the
employees of both the organizations (Savovic, 2012).

D)

Transformation

The fourth integration approach is integration through transformation. According to Savovic (2012), in
this symbiotic approach there is a need for change in both the organizations and as a result of the
integration both the organizations got disassembled and the approach of integrating operations is known
as transformation approach (Savovic, 2012). In this approach there is a need of total reinvention from
the combined organizations, by creating a new organization with the chosen best practices and strategic
capabilities. New organizational structure, organizational culture and vision distinctly communicating
the strategic vision of the organization have to be developed (Savovic, 2012).

E)

Holding

The fifth among the integration approaches is integration through holding. In this approach the acquiring
organization acts as a holding to the target organization with no desire of integrating themselves with the
target organization (Ellis and Lamont, 2004). This approach is different from preservation approach as
there is no strategic need for being separate.

J) Strategic Reasons
Now, after conducting the analysis of various models including the drivers of Internationalisation from
International Business, the potential strategic reasons for the acquisition of AstraZeneca are noted
below:

Pfizer can save on their taxes, as the corporate tax in the UK is less compared to the US by
moving their domicile from US to UK.
Pfizer can make use of their cash held outside the US to make the acquisition, which if brought
to the US will be subjected to high taxes.
Pfizer had lost their patent exclusivity of some blockbuster drugs including Lipitor in the recent
past, so acquiring AstraZeneca will help them improve their product range.
[34]

Sushin Surendran- 1564791

AstraZeneca has been conducting extensive research in to developing their oncology pipeline;
acquiring AstraZeneca will help Pfizer to enter the market of cancer drugs.
The previous acquisition of Pfizer with Wyeth didnt create the shareholder values that they
would have liked and unfortunately can be considered as a failure, this along with the patent
expiration has affected Pfizer badly, so acquiring AstraZeneca was an option for them to make
the repairs.
From the analysis of Competitive Profile Matrix, Pfizer lagged behind Novartis on certain
critical success factors, acquiring AstraZeneca would help them in improving their competitive
position mainly due to the synergies.
Pfizer can achieve relevant cost synergies by removing functions that are overlapping; this would
help Pfizer in saving on costs.
The new policies introduced by the UK Government, is also reason that has attracted Pfizer to go
for acquiring AstraZeneca, as these policies are quite attractive and are quite good for the growth
of the UK pharmaceutical industry.

K)

Yips Drivers of Globalization

The first framework that will be looked in to analyze the drivers for Pfizer to enter the UK is Yips
drivers of globalization framework. The two main drivers that has attracted Pfizer will only be discusses
in this part and they are cost and government drivers.

A)

Cost Drivers

The main accusation that Pfizer faced while they tried for the acquisition was that, the organization was
looking for tax savings because of the difference in corporate tax of US and UK (35% and 21%)
(Kollewe, 2014). The UK also provides credits on tax of 10% on profits obtainable to a new patent for
organizations to stimulate more investments in to research and development (Armitage, 2014). Pfizer
also had kept a good sum of cash outside the US and which can be made use of by them for the
acquisition of Pfizer and that would have helped them to avoid paying taxes for the fund if they had to
bring the fund to US (Kollewe, 2014). The potential synergy would have brought in high cost reduction
especially in R&D and operating costs, as relevant cost synergies can be achieved by removing
overlapping functions (Roland, 2014).

B)

Government Drivers

The UK government policies have always been a positive one for the pharmaceutical industries. About
82.5% of the total spending on health is spent by the government. In the year government made a life
science plan which will boost the sector. The trade policies of the UK are quite transparent (Landale,
2010). The present government under David Cameron has been quite open to new businesses coming in
to the UK and to attract new businesses the corporate tax got reduced to 21% in 2014 from 26% in 2011
and could further see a cut down of further 1% in 2015 (Armitage, 2014).
These are the drivers for Pfizer to go enter the UK as per Yips Drivers of Globalization framework.

L)

Porters Diamond Framework

The second framework that will be analyzed is Porters diamond framework. The two factors that will be
looked at out of the four factors are Factor conditions and Related and Supporting industries.
[35]

Sushin Surendran- 1564791

A)

Factor Conditions

The first factor is the factor conditions. The UK pharmaceutical industry has always been of the crucial
employment provider in the UK and employed around 72,000 people in 2012 out of which 23,000 was
in research and development. The abundant availability of highly skilled workers is one such factor that
is important to provide competitive advantage. The infrastructure in the UK is of world class and the
government in the UK has always been cautious in building infrastructure that stands with best. The
government spent around $300 million in order to help universities and small and medium businesses to
conduct research which indicates that the knowledge bank is also quite strong, again another factor that
provides advantage (Ogunshakin, 2013). The spending on R&D crossed the mark $8 billion and which
indicates that the investment made on innovation is quite high and this will certainly add on to the
national advantage in the pharmaceutical industry.

B)

Related and Supporting Industries

The UK pharmaceutical industry is an element of the cluster which also includes pharmaceutical
biotechnology and medical technology sector, which combined employs 175,000 people. The cluster
will have knowledge sharing happening that will help in the development of new technologies and
drugs. The UK government announced a plan in 2011, which will bring in the National Health Services,
the largest health care scheme in the UK, to play a vital part in the innovation of new drugs. NHS will
provide patient information from their database to the companies and which will help them in
developing new drugs and as well as the clinical trials will be conducted in NHS hospitals. This will
certainly give the country with a national advantage in the pharmaceutical industry.
These are the factors for Pfizer to enter the UK as per Porters Diamond framework.

M)

Modes of Market Entry

There are various modes through which an organization can enter another country. In this some of the
modes including acquisition will be discussed briefly.

1) Acquisition
The first possible mode is to acquire an existing organization. This is comparatively a quicker
way to establish in the market, since the organization has acquired one that has already been
there for sometime at least (John and Gillies, 1996).

2) Greenfield Investments
The second mode will be of Greenfield investment; this means that organization will start right
from the scratch in the new country by constructing operating facilities from the ground (John
and Gillies, 1996).

3) Licensing
The third one is licensing, in this the organization will have a contractual agreement with a
licensee, who will have the rights to sell or manufacture the organizations products or services
in that country (Ungson and Wong, 2009).

4) Foreign Direct Investment (FDI)


The fourth option is making foreign direct investment. In this mode the organization in the
entering country will have direct ownership that achieved through either acquisition or building

[36]

Sushin Surendran- 1564791


new establishment and the organization will not have to enter the country through another
organization (Ungson and Wong, 2009).

5) Management Contract
Management contract is another option for entering. In this mode the organization will enter in to
an agreement in which another organization will be allowed to run the organization completely
or in particular areas for a fee (John and Gillies, 1996).

6) Exporting
The sixth mode is Exporting and in this mode the organization will sell directly either product or
services to another organization in the targeted country. This is a good mode of entry if there is
less potential for sales in the market targeted (John and Gillies, 1996).

7) Wholly Owned Subsidiary


Wholly Owned Subsidiary is the seventh mode and in this mode involves investing directly in
the country in which the parent company has got in its possession the complete ownership and
management of the organization (Ungson and Wong, 2009).

8) Contract Manufacturing
The last mode of entry is contract manufacturing, in this the organization gives contract to
another organization in the targeted country to make products based on their specifications.
When there is a higher risk of investing in the targeted country, this is a good approach to make
use of (John and Gillies, 1996).
These are the various modes of entry. As far as Pfizer is concerned contemplating other options to enter
the UK is important, since the opposition party has asked for an expansion in anti-takeover regulations
and if implemented Pfizer would not be able to acquire AstraZeneca after the cooling off period.

N)

Discounted Cash Flow Method

The Financial Times has observed that the revenues of AstraZeneca will see a decline mainly because
the organization will lose their patent of certain drugs like Nexium, Crestor and Symbicort during the
period of 2014-2016. So, we are assuming the compounded annual growth rate to be -1% with stable
earnings before interest and tax margin. Using this and below mentioned assumptions the future free
cash flows will be forecasted.
Assumptions:
Current Assets/Sales- Same as 2013 value
Cash/Sales- Same as 2013 value
Depreciation and Amortization- Same as 2013 value
Current Liabilities/Sales- Same as 2013 value
Capital Expenditure- Same as 2013 value
Disposals/Purchases- Zero and constant
Terminal value- Replacement capital expenditure (Capital investments will be made use of to balance
the negative impacts of Depreciation and Amortization on the assets)
Forecasted free cash flows
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Sushin Surendran- 1564791


Sales
EBIT margin
EBIT
Effective Tax Rate
Current
Assets/Sales
Current Assets
Cash/Sales
Cash
Current AssetsCash
Current
Liabilities/Sales
Current Liabilities
Short term debts
Current
Liabilities-Loan
d(NWC)
Depreciation and
Amortization
Capital
Expenditure
Disposals/Purchase
Free Cash Flow

2013
25,711
21%
5,399
20%
79%

2014
25,454

2015
25,199

2016
24,947

2017
24,698

2018
24,451

5,345

5,292

5,239

5,187

5,135

20,335
45%
9,217
11,118

20,132

19,930

19,731

19,534

19,338

9,125
11,007

9,034
10,897

8,943
10,788

8,854
10,680

8,765
10,573

16,051
1,788
14,263

15,890
1,788
14,102

15,732
1,788
13,944

15,574
1,788
13,786

15,419
1,788
13,631

15,264
1,788
13,476

4,583

49
4,583

49
4,583

48
4,583

48
4,583

47
4,583

673

673

673

673

673

4,583

(2,530)
5,699

0
8,137

0
8,095

0
8,053

0
8,011

0
4,060

62%

The discount rate that is WACC) will be calculated by finding the cost of equity by making use of
Capital Assets Pricing Model (CAPM). The cost of debt is described as interest expenses over overall
debt.

WACC Calculation
Risk Free Rate (Rf)
Equity Beta ()

3%
0.68

10 year US treasury bond


Data as if on 31/12/2013

Market Risk Premium (RmRf)


Cost of Debt

6.7%

Ibbotson, long-term equity risk


premium
Interest Expense/Overall Debt

Tax Rate (t)

21%

After tax cost of debt

3.77%

4.77%

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Sushin Surendran- 1564791


Overall debt (D)

10.376

Data as if on 31/12/2013

Market Capitalization (E)

74,339

Data as if on 31/12/2013

Debt to total capital ( D/


(E+D))
Equity to total capital (E/
(E+D))
Weighted Average Cost of
Capital

12%
88%
7.09%

The market value of the equity is addition of discounted free cash flows and discounted terminal value.

Discounted Cash Flow Valuation

Future
free cash
flow
Discount
factor
Discounte
d future
free cash
flows
Growth to
perpetuity
Terminal
Value
Discounte
d terminal
value
Sum of
discounted
future free
cash flow
Total
Enterprise
Value
Overall
debt
Cash
Market
value of

2014

2015

2016

2017

2018

8,137

8,095

8,053

8,011

4,060

0.93

0.87

0.81

0.76

0.76

7,598

7,058

6,557

6,091

3%
99,224
75,437

27,303

102,740

10,376
9,217
101,581

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equity

As per the analysis done using DCF method, the market value of AstraZeneca is $101.5 Billion.

O)

Capital Structure Analysis

Since Modigliani and Millers theory of irrelevance is not applicable to this case as there is tax
consideration, Modigliani and Millers trade-off theory and pecking order theory will be made use of to
suggest the best possible sources of finance that Pfizer could make use of for the acquisition and the
possible impact that could have on the stock price.

A)

Modigliani and Miller Trade-off Theory

The trade-off theory put forward by Modigliani and Miller considers the presence of tax and since the
payments of debts are tax deductible, for an organization it is less risky to choose debt over equity, since
it is more inexpensive than equity (Danthine and Donaldson, 2005). Even though the Weighted Average
Cost of Capital of an organization can be brought down if debt is chosen over equity, having higher debt
is always riskier choice to consider for the organization (Danthine and Donaldson, 2005). So a balance
should be found out where both equity and debt will be mixed in the capital structure, where the risk and
decreasing Weighted Average Cost of Capital will be balanced.
Since Pfizer has got nearly 70-90% of their $49 Billion, outside the US as retained earnings and one of
the main consideration that they had for the acquisition was that they could make use of this money to
go for the acquisition which if bought to US could be subjected to tax. The remaining cash in the offer
required for the acquisition can be raised by a mix of debt and equity (1:2 debt-equity ratio) that will
help in the increase of EPS and stock price.

B)

Pecking Order Theory

According to this theory an organization should choose their retained earnings as their primary source of
finance and if there are no retained earnings or the retained earnings is enough; an organization should
look for other sources of finance (Julius, 2012). The theory states that debt should be the second choice
of finance and equity should be considered only as the last option. According to Julius (2012), the source
of finance that an organization chooses will give an indication of the performance of the organization.
Using retained earnings will indicate that the organization is performing strongly, using debt will
indicate that the organization is confident enough of meeting its obligations, but using equity will create
a negative impression and could make others think that the organizations share prices is overvalued and
they are making money before it falls (Julius, 2012).
Since Pfizer has got a considerable amount as retained earnings kept outside the US, the organization
can make use of it as their primary source of finance and the remaining cash needed for the acquisition
can be raised by taking debts till it is fine for the company to take, as according to the theory that is the
best option for the organization after retained earnings.

P)

Recommendations

The market value of AstraZeneca as per the calculation using Discounted Cash Flow method was
only $101.5 billion, even though the offer made on May 2, 2014 was more than that, reaching
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$106 billion it would be fine to raise the offer to at least $115 billion, as the synergies that can be
achieved through the acquisition is quite attractive and also the organization will get hold of
different product portfolios as well.
Another issue was that the acquisition would have caused disruptions which werent good for
AstraZeneca. Post acquisition an Absorption integration approach can be made use of by Pfizer
as there is high need for strategic interdependence and also by moving in a quick and consistent
manner, the disruptions associated with the acquisition can also be minimized.
The competitive position of Pfizer was also an issue that was looked upon in the report; there are
certain factors like HR management and Long-term investments where Pfizer has lagged behind,
so new HR policies needs to be brought in. Also Pfizer should look to make relevant potential
long-term investments that will have high returns in the future. Pfizer should also consider
overturning the decision of reducing R&D expenditure as innovation is quite important to have
competitive advantage.
One of the main issues for the rejection of the offer was that the main reason for the acquisition
attempt was to save on the taxes. A perception was created that the deal was only for cost savings
and so the acquisition will not have created any value in the long-term for anyone. So, there is a
need to convince all the stakeholders of AstraZeneca the potential strategic reasons for the
acquisition attempt and the synergies that can be achieved through the acquisition.
Pfizer will not be able consider acquisition as an option to enter the UK after cooling off period,
if the UK government agrees to the demand of the opposition party to make amendments to the
anti-takeover regulations. So Pfizer needs to consider other options and by analyzing various
modes, Foreign Direct Investment is a good option for them as there is no particular law that is
restricting any foreign investment in the UK.
In the analysis of the capital structure, two models were looked at and the sources of finance that
can be used were talked about under the relevant topic. Thus even though there was high Pfizer
stock, the shareholders of AstraZeneca will certainly receive good returns. If that doesnt
convince AstraZeneca, then Pfizer can increase the amount of cash in the offer by reducing the
stock, by paying 40% in cash and the remaining in stock.

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Pfizer will have to raise the offer to atleast $115 billion.

1)

Pfizer can make use of absorption integration approach to overcome the


disruptions.
Pfizer will have to bring in better HR policies, make potential long-term
investments and overturn the decision of reducing R&D expenditure to
improve their competitive position.
Highlight the potential synergies of the deal and overcome the perception
that the deal is just for tax savings.
Consider FDI as a mode of entry in the case of amendments to antitakeover
regulations as there is no particular law restricitng FDI in the UK.
AstraZeneca shareholders will receive good returns even if they have high
stock of Pfizer, if they do not agree then change the offer by giving 40% in
cash and remaining as stock.

2)
3)
4)
5)
6)

Q)

Limitations of the study

The integrated case study analysis has been conducted by making use of secondary data, and which
makes the analysis less dependable. Since the secondary data that were available might not be relevant
and could be dated out.
The theories and various frameworks that were made use of will have certain limitations that could also
have impacted the recommended solutions.

6) Learning Transfer
A) Company Introduction
Daiichi Sankyo Limited
Daiichi Sankyo Limited is a Japanese Pharmaceutical Company, which is the second largest one in the
Japan. Daiichi Sankyo was formed in the year 2005, as a result of the merger between Sankyo Company
Limited and Daiichi Pharmaceutical Company Limited both the companies belonged to Japan and had
their presence in the Japanese pharmaceutical industry for more than a century. The company is also a
member of the International Federation of Pharmaceutical Manufacturers and Associations. The
company has their operations in various countries in the world including US and Germany (Beena,
2014).

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Ranbaxy Laboratories
Ranbaxy Laboratories Limited is global pharmaceutical company from India, which was founded in the
year 1961 by Ranbir Singh and Gurbax Singh. The company has been a leading player in the
pharmaceutical industry ever since its establishment. The company has made their presence felt in
various parts of the world, including in countries like USA, Brazil, Russia and China. In 1973, the
company went public and the company has been recognized with various awards throughout the years
including OTC Company of the Year award (Beena, 2014).

Daiichi Sankyo and Ranbaxy Merger


In the year 2008, on June 11th, Daiichi Sankyo accepted to buy about 51% percent stake in Ranbaxy at
the rate of Rs.737 per share ($17), by the end of November 2008, the transaction was completed and
Daiichi Sankyo bought 63.92% stake in Ranbaxy Laboratories and the deal was worth $4.6 billion
(Lakshman, 2008). The price at which the shares were bought gave a 53.5 % premium to average
closing price. The deal was supposed to create long-term synergies including in cost savings (Milmo,
2008). This acquisition was one among the largest acquisition of an Indian listed company (Lakshman,
2008).
The merger was considered as a failure and there were many reasons for the failure of the merger,
including lack of due diligence from part of Daiichi Sankyo. Two such problems will be discussed and
analyzed and potential recommendation will be provided to those problems.

B) Importance of Learning Transfer


The similarities in the acquisition of both the acquisitions make the learning transfer important as both
the acquisitions belonged to the pharmaceutical industry.

C) Problem 1
Daiichi Sankyo was a Japanese company while Ranbaxy belonged to India. Since Daiichi Sankyo
secured 63.92% of share, they were directly involved in the functioning of Ranbaxy, which ultimately
created an integration issue mainly due to cultural difference and caused disruption in the performing of
the company (Sinha, Majumder et.al, 2014).
The researcher will make use of Post-acquisition integration approaches to choose one integration
approach that will help in resolving the issue and overcome the disruptions which will ensure smooth
functioning and achieve desired synergies.

D) Solution to Problem 1
Post-Acquisition Integration Approach
A company can make use of different integration approaches like preservation, absorption, symbiotic,
transformation and holding to overcome the integration issues that are faced as a result of Mergers and
Acquisition.
Symbiotic approach is an integration approach that is applicable when there is a need for both strategic
interdependence and organizational autonomy. In this approach there is a certain level of change
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happening in both the companies as the best practices of both the companies are tried to be incorporated.
There will be an environment of co-existence and which will ensure cooperation is created between
employees of both the organizations.
Since Daiichi Sankyo has not acquired Ranbaxy completely, so there is a need to provide Ranbaxy with
a certain level of strategic interdependence and organizational autonomy. So as far as the merger of
Daiichi Sankyo and Ranbaxy is concerned, symbiotic approach is the best option to overcome the
integration issue which is one of the main reasons for the failure of the merger.
Both the companies should be welcoming the change that will be a result of the merger and the
leadership of the merged company should be open to changes and must understand the importance of
successful integration. The best practices of both the companies that are in the best of the interest of the
merged entity should be identified and incorporated so as to ensure that the desired synergies are
achieved.

E) Problem 2
Daiichi Sankyo financed them for the deal by using a mix of retained earnings and debt. The first quarter
post- acquisition posted disappointing results for both the companies and the share prices also stayed
low and the earnings per share also were low which not something that was expected post acquisition.
The performance during the later times was also not so bright for both the companies post- acquisition,
which is another reason due to which the merger was considered as a failure (Sinha, Majumder et.al.,
2014).
The potential reason for this must have been a mistake from part of Daiichi Sankyo in choosing their
source of finance because when considering the debt-equity ratio of Daiichi Sankyo post acquisition it
has shown an increase, which indicates that there was an increase in debt which would have impacted on
the results.

F) Solution to Problem 2
Capital Structure Analysis
Modigliani and Miller Trade-off Theory
The theory put forward by Modigliani and Miller states that debt is less risky as a source of finance
compared to equity, but it is important from the perspective of a company to make sure that a there is a
balance between debt and equity as having higher debt is riskier for a company. This will ensure in
having higher earnings per share and share price.

Pecking Order Theory


Pecking order theory is another that deals with capital structure, according to the theory an organization
should make use of their retained earnings as their primary source of finance and then should choose
debt and equity should only be considered as the last source of finance. But the theory also states that an
organization should take debt up to a level till it is fine for the company takes which means that the risk
is not high and the organization will make enough revenue to pay the interests.

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Daiichi Sankyo chose a mix of retained earnings and debt to finance them for the deal, but the debt that
they took to pay off for the deal is more than what they could have taken which have impacted
negatively on the earnings per share and share price of the company. Thus Daiichi Sankyo should
consider the financial health and reduce the debt taken and raise the remaining funds by issuing equity.

7) Conclusion
The Integrated Case Study provided a critical analysis for both acquisitions involving Pfizer and
AstraZeneca and Daiichi Sankyo and Ranbaxy. The problems faced during the acquisition attempt and
post acquisition has been analyzed critically. The problems can be resolved with the help of the
recommendations that the researcher gave.
The study has thrown light on the importance of various business disciplines including finance, strategic
management and international business to have successful mergers and acquisitions.

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9) Appendix
Mind Map

Low
corporate tax

Significantly
undervalued
offer
Government
Intervention

Delay in drugs
innovation

Tax credit to
encourage
innovation

Tax
inversion

Reduction in
R&D spending

Cutting
down
employees

Cost
reductio
n

Finance

Challenges
Pfizer
Acquisition of
AstraZeneca

Loss of high
quality jobs

Strategic
Management

Threatened
national
interest
Short,
Inadequate
commitments

Yips
Globalisation
Drivers

Tax Savings

High market
share

Government
drivers

Cost drivers
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Mergers &
Acquisition

Strategic
method

Attain
speedy
growth

Reasons
Synergy

Cost
efficiency

International
Business

Related and
Supporting
industries

Entry
into
new
markets

Porters
Diamond

Factor
conditions

Enhanced
operating
efficiency
especially in
R&D

Sushin Surendran- 1564791

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ARU Research Ethics Form

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