Thursday, May 17, 2012

AZ and GSK - quo vadis

AstraZeneca and GlaxoSmithKline: A chorus of mis-approval

One of the more striking aspects about the potential billion-dollar acquisitions recently announced by UK drugs giants AstraZeneca and GlaxoSmithKline, which we discuss in more detail in A bargain missed, was the universally positive welcome they received from analysts and brokers – the so-called ‘sell-side community’.

The overwhelming view was that, regardless of the fact they offered almost nothing in the way of profits or even sales, the deals were good news and, hopefully, just the start of a spate of merger and acquisition activity in the sector. The positive reaction seems to stem from the perception at least Astra and Glaxo are doing something – and that something is neither cost-cutting nor buying back shares.

This all illustrates the difficulties of squaring the demands for growth from the sell-side community with the demands of the ultimate investors, whose desire and focus is on shareholder value. Sometimes the two are interlinked but often they are not. However, given that they are the ones providing the lion’s share of the commentary, the voice of the sell-side community tends to be louder.

At the recent inaugural London Value Investor Conference, we presented – among other things – the bull case for Astra and noted that, while there was profit uncertainty, the valuation looked like it priced in a severe decline in profits. We did not, however, talk about the risks associated with acquisitions but – no matter how loudly the sell-side community may shout – deals are potentially the biggest risk in the Astra investment case.

No comments: