Pfizer’s decision to close its huge R&D site in Sandwich, Kent (below) has sent shock waves through the country. While the news has come as a suprise, the writing had perhaps been on the wall since the animal health department was moved from the site a few years ago.
What struck me most though was a paragraph in the FT that claimed ‘in the decade 2000-2010, it spent some $230bn on acquisitions. The result is a business with a market value today of $154bn.’
A staggering destruction of shareholder value by any scale I’m sure you will agree.
And I must admit I’m still puzzled about how this could have occured, but I think I may have been introduced to one of the reasons in yesterday’s strategy class.
And that is that the managers in Pfizer failed to realise they were trying to apply a cost-based value creation approach to a situation that would have been best served by a knowledge-based approach
M&A value creation logic
Before I can delve any further into this it may be helpful for me to briefly descirbe the theory that highlights 3 key approaches to value creation though M&A activity.
The governance approach leaves the acquired business alone and pressure is applied through existing management so that the parent company’s financial targets are met.
Cost-based value creation involves stripping out cost from the acquired business by removing support functions and consolidating overhead costs.
Meanwhile, the knowledge-based approach takes longer and is far more delicate. It involves the identification of key human resources and networks and ensuring those people that have created the value for the company are not lost during the consolidation. But in the atmosphere of fear that often arises after a merger, these people often leave especially as they are often the most capable and therefore the most attractive to rival employers.
I believe this is one of the key reasons why the pharmaceutical industry has been so poor at making M&A work. It is so easy to lose the people that create value from an organisation during an acquisition or reorganisation. What’s more those people may only be so effective because of the networks around them – remove the underperforming prankster that keeps spirits up within a team and all of a sudden productivity could fall off a cliff.
A true analysis of the value networks in such huge organisations will take a long, long time and be particularly difficult to conduct – especially as the drug discovery process is a decade long effort
But while I feel sorry for the employees, I really feel for the patients who may have been saved from pain, suffering and even death had the mergers focussed on preserving the knoweldge and talent of the acquisition target rather than simply the identification of ‘synergies’ and drug pipelines.
As I write this the next mega-merger has started to take place – Sanofi Aventis’ buyout of Genzyme – and I wonder whether this time a pharma company will be able to create value for its shareholders and the patients it should be serving.