The last few weeks have been a fantastic opportunity for AstraZeneca (LSE: AZN) (NYSE: AZN.US) shareholders. If you’re unhappy with the failure of the Pfizer bid, then I’m afraid it’s probably because you failed to take advantage of this opportunity.
Let me explain.
Mega-cap deals like the Pfizer-AstraZeneca situation are controlled by company boards and a handful of large institutional investors.
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As private investors, we have no influence whatsoever — but we can often profit from these situations, as the public and long-winded nature of many takeover negotiations gives us the opportunity to choose which outcome we’d prefer.
In my view, this is exactly what happened with the AstraZeneca bid.
1. Cash out
AstraZeneca’s share price traded between £46 and £48 for three weeks. During this period, AstraZeneca shareholders had the chance to cash out.
Several institutional investors chose this option, including (reportedly) Neil Woodford‘s former employer, Invesco.
Although the share price didn’t quite match Pfizer’s bid, shareholders could sell immediately for cash, removing the risk that the deal would fall through, and avoiding being lumbered with Pfizer shares in part payment.
2. Lock-in a higher income
For income investors, selling AstraZeneca would have been a smart move, in my view.
In a previous article, I explained how investors could have locked in an income boost of up to 170% by selling their AstraZeneca shares, and reinvesting the proceeds in GlaxoSmithKline.
3. Backing the board
Shareholders could have decided, like top fund manager Woodford, that Astra’s long-term prospects are worth more than £55. Yesterday, Mr Woodford said that he’d opposed the bid, and backed AstraZeneca’s board in its rejection of Pfizer’s proposals.
Warning signs
Shareholders who wanted to sell, but held out for a higher price, were taking a gamble on Pfizer’s success.
Admittedly, this is the first time Pfizer has failed in a takeover bid, but there were warning signs. Pfizer’s share price fell by 8% between April 30, when the bid was announced, and last Friday. This made it hard for Pfizer’s board to fund a higher bid, as the value of the shares they were offering AstraZeneca kept on falling.
What next?
Under UK takeover rules, Pfizer is prohibited from making another offer following its final proposal, unless AstraZeneca’s board decide to back the £55 proposal, or a second company makes a higher bid. Both seem unlikely.
I suspect AstraZeneca shares will continue to drift lower, as the bid premium evaporates, and the firm’s valuation returns to normal.
