Ian C. Read's Latest AstraZeneca "Offer" Is At Least $15 Billion Too Light: Exclusive

Well, overnight Mr. Read increased the "pieces of eight" in Pfizer's pirate offer marginally, and bumped the overall price by $6 billion -- to $106 billion. Of course, as the Reuters link indicates, the AstraZeneca board almost immediately rejected it -- as inadequate. And they are right.

As I have said before, there is still almost no chance Mr. Read's current math will work -- for an IRS sanctioned inversion, and a resultant drop in combined entity tax rates. Mr. Read had earler disclosed (on Thursday morning) that about 27 per cent of AZ's voting shares are held by the very same institutions as those holding Pfizer's. His implication would seem to be that these institutions will vote for even a hostile deal, in a now clearly-looming proxy battle.

But that also implies he will have trouble getting more than 20 per cent of the resulting, combined company into the hands of non-Pfizer shareholders. That "resulting company more than 20 per cent" test is one of the many baffles he will have to clear -- to avoid the IRS's various and complicated restrictions on "sham" redomicile transactions -- i.e., ones undertaken primarily to avoid US taxes.

In short, his math is sketchy at best -- to qualify for an inversion and reduced re-domiciled UK corporate tax rates.

Of perhaps even greater moment though -- is my personal (albeit experienced) opinion that the AZ board may pretty safely just say "no" -- and do so, for quite a while here. My math suggests an almost all cash, nearly $120 billion offer [not a 66 per cent Pfizer stock (i.e., risk of deal-price erosion) loaded one] will be required for AZ's board to be compelled at law, to begin negotiating in earnest. At that all cash, or nearly all cash level, Mr. Read's vaunted inversion becomes impossible -- on the math. You heard it here first. Reuters, then:

. . . .AstraZeneca's board said the offer "substantially undervalues" the company and was not an adequate basis on which to engage with its suitor.

Industry analysts said that raised the possibility that Pfizer would now take the takeover plan, which would boost its pipeline of cancer drugs and create significant tax and cost savings, direct to AstraZeneca shareholders.

The U.S. group would much prefer an agreed deal, since hostile takeovers typically take longer, require a higher final price and carry more risks because the bidder cannot access the target's books to assess its business. . . .

Yes, friends -- "direct to AZ shareholders" means. . . a proxy battle. Fully hostile. [I may fall out of date on this for a bit, while largely off-grid over the weekend. Just fair warning. May post without graphics -- by phone -- if something amazing happens.] We shall see, but I expect we are many weeks from an agreed deal. Or any deal at all, actually -- that a super majority of AZ's shareholders will tender favorable proxies upon. And Mr. Read must make some firm declarations, on or before May 28, 2014 -- under applicable UK corporate takeover laws -- just to dial the calendar, ahead here.

To be clear, the drop in Pfizer's world wide tax rates alone, is well worth another $15 billion in purchase price paid, to Pfizer. And AZ's board is well within its legal rights to demand that the value of the tax haven it sits within benefit its own (AZ) shareholders, in a deal with a US multinational like Pfizer. That is the first law of comparative advantage -- in deal making.

And so -- my current thinking is that it would take a very friendly (i.e., minor) miracle deal to secure the tax inversion in an almost all-cash $120 billion offer for AZ. Thus I think -- for the moment -- Mr. Read must either give up on the inversion, and go hostile while paying US tax rates -- or try to overpay, be very friendly. . . very generous. . . and work out a possible inversion, with AZ's willing cooperation. But that looks dodgy at best from where I sit -- based on Mr. Read's historically-demonstrated lack of flexibility in these sorts of matters. As I always say -- we shall see.