In recent weeks, two pharmaceutical stocks, AstraZeneca (NYSE: AZN) and Bristol Myers Squibb (NYSE: BMY), have become the subject of merger rumors. At the start of the month, the Financial Times dropped a potential bombshell when, in an exclusive report, it reported that the two companies, both considered blue chip stocks, were close to merging in a deal that would create an oncology-focused big pharma powerhouse worth around $400 billion. Put simply, investors reacted negatively to the proposed deal, pushing AstraZeneca shares down by around 9% after the rumors first emerged.
Subsequent headlines suggest that the proposed merger isn't likely to happen. This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia.
For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue » Still, until confirmed, it may be best to assume that a deal is possible. While on the surface, it may look like a winner, a closer look validates the market's more negative take on the proposition.
Admittedly, it's not uncommon for an acquirer's stock to fall upon announcement of a megamerger. After all, if an acquirer is paying for the stock with its own shares, it creates the opportunity for merger arbitrageurs to short the acquirer and go long the target, locking in profits from the deal spread. That said, as there's no announced deal or deal prices, the arbs haven't even entered the trade yet.
Blame this decline on criticism of the rumored merger plans. On paper, there are substantial potential synergies between the two companies. Both are currently competitors in the oncology space.
If combined, it could create a powerhouse in this segment of the pharmaceutical market. However, the prospect of the combined entity having such a massive share of the oncology market would make it difficult for the proposed merger to pass antitrust regulators' scrutiny. Potential cost and growth synergies notwithstanding, AstraZeneca would also have to contend with Bristol Myers Squibb's looming patent cliffs or the loss of patent exclusivity for flagship drugs like blood thinner Eliquis and cancer therapy Opdivo.
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