Pharma M&A: Taking stock

One sign of a top in the merger market is that more deals are done with shares, rather than all in cash. Acquirers - inhaling deeply of animal spirits - use shares for deals so big that the maths of an all-cash bid would not work.

Take Mylan, the generic drugmaker. It is chasing Perrigo , the over-the-counter pill company. Its offer is $230 per share, with more than half in shares. Mylan shares may seem an attractive currency; between 2010 and 2014 they rose 200 per cent. But stocks are forward-looking and, over some period, performance reverts to the mean. For Mylan, that time may be now.

Last week, Mylan reported weak, first-quarter revenue and earnings. That is worrying when it is both hunting Perrigo and fighting a bid from its rival Teva - declining prospects make both jobs harder.

Mylan shares are off a tenth in the past two weeks. Its stock price balances various possible outcomes: that it buys Perrigo and realises cost savings; that it is acquired by Teva for a big premium; or that it makes its way alone. Perrigo, for its part, is treating Mylan's offer as if the stock component was worth $55 a share, rather than the $70 level reached since the Teva bid. This is a little unfair. Mylan will remain a target even if this Teva offer falls through.

Mylan's biggest problem is not an unwilling Perrigo or an avaricious Teva, however. It is its own grouchy shareholders. To overcome Perrigo's resistance, Mylan has already boosted its offer by tenth. The new money comes directly out of its shareholders' pockets, of course. Worse, Mylan has said the deal on the table will not boost earnings until the new company is "fully synergised" four years hence - by which time it will be impossible to pick apart the effects of the deal and unrelated changes to the business.

At the same time, in its efforts to fend off Teva, Mylan has referred to the Israeli company's shares as "low quality" and "high risk". Teva's shares had lagged behind for years (between 2010 and 2014, they fell a quarter). Mean reversion suggests their subsequent returns might now be more attractive to Mylan shareholders than Mylan's own stock.

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