Pfizer's Close-to-the-Vest Stance Has Arbs Wondering What It's After

The drug giant hasn't begun an exchange offer for Warner-Lambert shares, which leaves some Wall Street pros wondering.
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The $80 billion battle for control of



has just begun, but already investors are questioning some of the players' tactics.

Specifically, Wall Street pros are scratching their heads over the tactics of


(PFE) - Get Report

, which

yesterday announced a hostile bid for Warner in an effort to snatch the drug giant out of the arms of

American Home Products


, Warner's preferred merger partner. More than 24 hours after announcing its bid, Pfizer hasn't demonstrated that its offer is serious, according to risk arbitragers, who make a living evaluating both friendly and hostile takeover offers.

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So what's Pfizer doing wrong?

According to several arbs, all of whom spoke on condition that they not be identified by name, the company hasn't taken several steps that would prove that its bid is serious, including trying to remove Warner-Lambert's board and formally submitting an offer to buy Warner's shares. In addition, pharmaceutical investors -- who generally feel that Pfizer can

ultimately prevail -- suddenly have become worried about Pfizer's motivations. Pfizer wasn't immediately available to comment.

What Price Warner?

With Pfizer shares down sharply today, the company's all-stock bid for Warner has suddenly gotten less attractive. Yesterday, Pfizer's offer was valued at around $96 for each Warner-Lambert share, more than $10 greater than the American Home deal. Today, with Pfizer off 2, or 6%, at 35, it's worth a mere $87.50, and the gap has narrowed to around $6, with American Home's (its shares were unchanged at 55) offer recently worth about $81.

The less Pfizer's offer is worth, the easier it will be for Warner to reject it and stick with American Home, its first choice. In other words, Pfizer's tactical blunders could cost the company dearly strategically.

"Right now, it's just sort of a bearhug, even though

Pfizer went to court," says one arb who hasn't taken a position in the deal. "I'm surprised they didn't launch an exchange offer. And they should have a conference call ...

to tell people you're committed and serious.

"We're just waiting to see things shake out a little more, because we're not really sure they're going to succeed in the courts," the arb says.

No Accounting for Taste

This person also says Pfizer's insistence that it won't buy Warner unless it can do so under pooling accounting is foolish. (Companies can use two types of accounting for a takeover. While neither affects the amount of cash that a company actually generates, most companies prefer pooling because the alternative, purchase accounting, creates large noncash charges that lower reported earnings.)

"To condition the deal on pooling, it just seems short-sighted to me," this person says. "If the deal makes so much sense to them, who cares if the reported EPS is knocked down because of the noncash amortization charge."

Another arb, who is short Pfizer and long Warner-Lambert, says Pfizer hasn't done a good job explaining the deal to sell-side analysts or investors. That has raised questions about why Pfizer, which until recently claimed it was strong enough to stand alone, has suddenly decided it needs a merger partner. Analysts at

Deutsche Banc Alex. Brown

, which hasn't done underwriting for Pfizer, have been especially vocal, cutting their rating on Pfizer to market underperform from buy and holding a conference call to discuss their fears.

The Long View

One health-care money manager says that investors are thinking that perhaps Pfizer's long-term prospects are weaker than people think, which makes it more desperate for a merger. (The money manager is long both American Home and Warner, but not Pfizer.)

Also, the speculation on the Street Friday is that there may be contractual subtleties to the pact between Warner and Pfizer on the cholesterol-lowering megadrug


that will hurt Pfizer in the future.

"Is there something wrong with the long-term pipeline?" asks the money manager. "Maybe they had nothing to talk about at upcoming R&D meetings."

Both of Pfizer's biggest growth products, Lipitor and pain-drug


, were developed by other companies and are only co-marketed by Pfizer. (Celebrex was developed by


(MTC) - Get Report

, which itself has a storied history with American Home following the collapse of last year's merger proposal.)

"Pfizer all along has said they don't need to merge," the money manager says, arguing that mergers were a big distraction. "Of course, what are they doing here? A big merger. In some sense, it can be construed as a sign of weakness."

Not everyone agrees. One arb who's bullish on Pfizer's chances, and accordingly is short Pfizer and long Warner, says the company set up its offer expertly: It slowly turned up the pressure on Warner's board by expressing its interest in a deal over the last several weeks, before American Home's bid became public. That makes it more likely that the courts will block the "poison pills" that Warner has adopted to block Pfizer's bid, this arb says: "Pfizer's on very advantageous footing in this situation."

Generally, investors regard Pfizer as the stronger company and, in the parlance of Wall Street, "the better piece of paper." But one thing will make it even better: putting all its cards on the table.