Question

Pfizer, a leading pharmaceutical company, acquired drug maker Pharmacia for $60 billion, betting that size is what mattered in the new millennium. Pfizer was finding it difficult to sustain the double-digit earnings growth demanded by investors due to the skyrocketing costs of developing and commercializing new drugs. Expiring patents on a number of so-called blockbuster drugs intensified pressure to bring new drugs to market. In your judgment, what were the primary motivations for Pfizer's wanting to acquire Pharmacia? Categorize these in terms of the primary motivations for mergers and acquisitions.

Answer 1

The deal was an attempt to generate cost savings from being able to operate manufacturing facilities at a higher average rate (economies of scale), to share common resources such as R&D and staff/overhead activities (economies of scope), gain access to new drugs in the Pharmacia pipeline (related diversification), gain pricing power (market power), and a sense that Pfizer could operate the Pharmacia assets better (hubris). Pfizer seems to believe that “bigger is better” in this high fixed cost industry. Also, with many patents on existing drugsexpiring, the firm is hopeful of gaining access to what could be future “blockbuster” drugs.