When is a company too big? When does it make sense to break up a company, like General Electric or Citi, into smaller parts? In most cases, streamlining a corporation means getting rid of ill-fitting pieces, like General Electric did with NBC Universal. Historically, the decisions to break up a company or to sell off individual business units are almost always company-specific. Rarely does a company follow an industry-wide trend when making such significant decisions.
The Right Direction
Over the past six months Pfizer has had a significant jump in its stock price, recently hitting a multi-year high. In large part, this is due to several positive steps taken by the company since the problems with Celebrex rocked the company in 2004. First, they made a major acquisition in buying Wyeth in 2009--brilliant timing, given the economic cliimate at the time. Then, they decided to sell their infant-formula division to Nestle for $11.85 billion. And now, sometime in 2013, Pfizer will spin off its animal-health division, calling the new entity Zoetis. Pfizer can use the proceeds from this spinoff to repurchase shares, which will further boost the stock price. All of these decisions have pushed Pfizer in the right direction.
All of these decisions have also fed the rumor mill, which strongly believes that Pfizer will split into two separate companies. As early as March of 2012, a note from a Goldman analyst to investors suggested that Read, Pfizer’s CEO, may be pursuing a breakup if the sales of the animal-health and nutrition units were successful. And then, this week, that hearsay was confirmed by Gene Germano, the president of Pfizer’s oncology and specialty care businesses, as reported by the San Francisco Chronicle and Bloomberg. Germano suggested that, under the right conditions, Pfizer might be split in half--one half would be the innovative business, the other half would be the value business. This breakup would probably not occur prior to 2015.
Abbot Laboratories is the obvious precedent in this monkey-see-monkey-do scenario. They just finished spinning off their pharmaceuticals business, creating Abbvie , an entirely separate company. Unlike Pfizer, Abbot has retained their nutritional business, which produces the infant-formula Similac. The problem with this model is that Abbvie will sink or swim based on new drugs being developed and brought to market. However, there has been much speculation that Abbvie may be a takeover target, since it does have several promising drugs for hepatits C in its pipeline. One of the major criticisms of Abbvie is that it will not be able to overcome the loss of Humira, an anti-inflammatory drug, which goes off-patent in 2016 and makes up a significant portion of its sales and profits. On the upside, investors will now be better able to see the value in Abbot Labs, especially its medical devices business, which is well known for its drug-coated stents.
Pfizer has done a stellar job of unlocking hidden value by making well-timed strategic moves. Now may be a good time to ride Pfizer a little bit higher, if you have not already gotten in on this name. It may see another fifteen-twenty percent gain from here. On top of all this momentum, Pfizer is currently paying a quarterly dividend of 24 cents per share.
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