In a perverse irony, the same TARP funds that were envisaged by our prudent leaders are now resulting in massive layoffs. While I’d like to say that correlation is not causation, consider the linear progression of events today, the same single day that over 70,000 job cuts were announced:
As more details emerged from Pfizer’s bid for Wyeth, it was divulged that it was financing one-third of its $68 billion takeover with debt from 5 major banks – JPMorgan, Bank of America, Barclays, Citi and Goldman Sachs. Notice any familiar names in there since TARP was enacted? Without such financing, Pfizer obviously wouldn’t have been able to make a run for a company as large as Wyeth.
As part of its plan to capitalize on synergies between the two companies, Pfizer announced that it will ultimately cut 15% of the combined workforce of the two companies – 19,000 jobs.
TARP fund infusion = Consolidation = Mass Layoffs
Look, we live in an extremely capitalistic environment here, and consolidation and subsequent layoffs are going to occur. What probably wasn’t clear to the politicians who voted for this TARP (note: the vast majority of Americans were against it) was the law of unintended consequences. We may see more of this in the auto industry, airline industry, banking, and any mix of large companies where these funds that didn’t exist otherwise are looking for a home and now they’re going to be finding a home on the leveraged buyout front.
From an investment standpoint, Pfizer, GSK and others have already shown us that megamergers don’t really deliver shareholder value and in fact, most deals aren’t accretive for several more years than projected, if at all. But Pfizer needs to try to fill a major gap in its pipeline with the impending patent expiration of Lipitor. I don’t think the play is in Pfizer stock (they announced they’ll need to cut the dividend in half, so don’t get any ideas there). It’s in the bond offering they’re going to need to pay down this bank debt. Given their debt load moving forward, it’s likely Pfizer will undergo at least one downgrade in corporate debt ratings. This will translate into perhaps a 6-7% yield on bonds issued in the following year for what is essentially a risk-free asset. While I’m skeptical of the long-term value generated by pharma megamergers, Pfizer clearly isn’t in danger of going insolvent.
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