Pfizer Inc has already had its takeover overtures rebuffed three times by rival AstraZeneca Plc, but investors in the U.S. drugmaker say it can tolerate a little more rejection before going hostile with the deal.
AstraZeneca turned down a sweetened Pfizer cash and stock offer on Friday that amounted to 63 billion pounds ($106 billion), or about 50 pounds per share, saying it substantially undervalued the British drugmaker. The raised offer followed unsolicited Pfizer approaches in late April and January.
Investors and analysts say Pfizer needs to raise its offer as high as 52 to 55 pounds per share to close the deal, as well as increase the cash portion to as much as 50 percent from around 30 percent.
While several analysts and shareholders said Pfizer needs to do a deal of this sort to restore its fading competitive edge, those who talked to Reuters did not believe Chief Executive Ian Read was likely to go over the heads of AstraZeneca management and directly to shareholders quickly. He may even walk away if a friendly deal can't be done.
"I don't think Ian will take that route," said Brian Turner, healthcare analyst for Levin Capital, which holds more than 11 million Pfizer shares.
"I think he believes he can get the deal done," added Turner, who knows Read personally. "If he's told he's not coming in at a price that's sort of equitable for both parties, at the end of the day he'll just go away."
The 60-year-old Read, a Scot who grew up in what was then Rhodesia (now Zimbabwe), has spent his entire career at Pfizer. An accountant by trade, Read joined Pfizer in 1978 as an auditor and rose through the ranks to become head of global pharmaceuticals in 2006. He was called upon to take over in December of 2010, when predecessor Jeffrey Kindler suddenly retired.
Bill Smead, Chief Executive of Smead Capital Management, which holds almost 90,000 Pfizer shares, expects a measured approach and higher offers.
"There's hostile, there's friendly and then there's just patience," he said.
"I think they will walk away if it doesn't work out, but there's nothing we're seeing ... that wouldn't indicate that this is just the normal process that ends with marriage. You're probably one or two offers away from that."
Under British takeover rules, Pfizer has until May 26 to declare its firm intention of making a bid, or walking away.
COMPLICATIONS TO GOING HOSTILE
A purchase of AstraZeneca could help Pfizer on several fronts. It would bolster the pipeline of cancer drugs in development, allow it to re-domicile in Britain to take advantage of a significantly lower corporate tax rate there, and to use tens of billions of dollars it has overseas without having to pay high taxes to bring the cash back to the United States.
Both companies' shares rose with the original announcement, a sure sign investors liked the idea.
Pfizer has declined to comment on its strategy.
"We believe we will make an offer that is attractive to the shareholders of AstraZeneca," said Pfizer spokeswoman Joan Campion.
A hostile bid would be complicated by the fact that Pfizer needs the deal to have a substantial stock component in order to do the tax inversion and re-domicile in Britain. A straightforward cash offer would not accomplish that.
Marshall Gordon, healthcare analyst for ClearBridge Investments, which holds more than 20 million Pfizer shares and more than 729,000 AstraZeneca ADRs, said he believes the largest U.S. drugmaker does not want to go hostile, but might have painted itself into a corner.
"They need to get this deal done because they've gone public with it and the market has said they like the deal," Gordon said. "It's hard to back down now."
Gordon expects Pfizer to up the ante.
"To get Astra's management to the table and get a friendly agreement, Pfizer will have to offer more. There's probably some room to go."
Len Yaffe, portfolio manager for the healthcare fund StockDoc Partners - which has Pfizer holdings - believes Pfizer is more likely to walk away than take its case directly to AstraZeneca shareholders.
He sees the deal as far less essential to Pfizer than its 2000 purchase of Warner-Lambert, which was necessary for it to gain full control of the cholesterol-fighting drug Lipitor.
Pfizer took that bid directly to Warner-Lambert shareholders, ultimately buying the company for $90 billion.
"If they go hostile, I would be surprised, but Pfizer has to replenish the pipeline for their next phase of growth," Yaffe added.
In 2008, when Pfizer was frustrated in its attempts to reach a deal with rival Wyeth, it signaled its willingness to go hostile. The two sides reached a $68 billion agreement completed in 2009.
"When it became clear that Pfizer was willing to go hostile, (Wyeth) entered talks relatively quickly," recalled Seamus Fernandez, an analyst with Leerink Partners.