Pfizer Pfizzle?

The recent announcement of Pfizer's (PFE) plan to purchase Wyeth (WYE) has been met with price declines in the shares of both companies. While investors acknowledge that PFE must replace a diminishing pipeline with new products, and further acknowledge that WYE brings the new areas of vaccines and biologics to PFE at a good price to PFE, the stock prices indicates investor dissatisfaction.

Stock price behavior can be meaningless over the short-term and analysts move into this area at their own risk, but I believe that some of the issues point out some of the current challenges.

PFE has one of the most secure financial positions I have ever studied as indicated by its triple-A rating. PFE has $24 billion of investable funds and a free cash flow of $13 billion a year - at least for 2009 through 2011. These funds almost total to the $68 billion purchase price alone.

With this kind of financial strength, not including the $12 billion of cash of WYE's balance sheet (albeit with higher debt levels than PFE), PFE should be able to command a low rate. However, the banks' insistence on a seemingly high 8% combined with strict back-out provisions and a one-year term on the loan may be making investors nervous.

These demands do indicate a return to pre-Housing Bubble standards. The banks are not attempting to buy business at minimally profitable levels. Even more, banks seem to be forcing businesses to pay up for deals. By raising the price of an acquisition, the likelihood is that deals done today will look smarter in retrospect. So, what seems to be a negative today may ultimately be viewed more favorably.