Milk - Why Pfizer sells and Nestle buys



Wyeth products in China.
Photo source jacynkong.blogspot.co.uk

Pfizer and Nestle, two of the largest names in industry, are once again adorning the front pages as Nestle bids $9bn for Pfizer’s nutrition unit. But why are Pfizer selling and Nestle buying?

Since acquiring the unit from Wyeth in 2009, Pfizer’s nutrition unit has been performing well. Revenues from the unit have increased ~15% from 2010-2011 to reach $2.1bn (~3% of Pfizer’s total revenue). And this trend is likely to continue considering Pfizer’s strong presence in China’s milk market, which already accounted for ~25% of the global market in 2009 (ubic-consulting) and its annual growth rate is in two digits. The business, therefore, should effectively diversify Pfizer’s offerings and the revenues generated help shield Pfizer from drying revenues elsewhere. Why then, would Pfizer sell?

As it turns out, Pfizer is selling the unit to refocus its business and, in fact, offset the negative impact of the patent cliffs. Several of Pfizer’s bestsellers, including Lipitor, Xalatan, Effexor, and Zosyn, are facing patent cliffs between the years 2011-2013, affecting roughly $17bn of its sales in 2009. As a result its share prices are down and shareholders are tested with the low return on investment.

Selling the nutrition unit will give Pfizer three strategic advantages. Firstly, the move eases the pressure from investors as it can be viewed as Pfizer’s commitment to uphold the CEO’s promise to “take advantage of our core capabilities” and concentrating on its most profitable and competitive capability; making drugs. Secondly, the sale will increase the capital it have available for pipeline expansion through M&A, funding R&D, or increasing dividends to shareholders. And lastly, China’s milk market, though lucrative, is not without its dangers. The market has suffered numerous scandals resulting in overwhelming buyer distrust of locally produced milk. Pfizer’s Wyeth, which produces its milk in China, may therefore struggle to compete with importers such as Mead Johnson, who currently dominates the market. Pfizer, then, has made a wise choice to exit this market.

Nestle milk under inspection.
Photo source http://www.duchawang.com/

Nestle, on the other hand, has its core capabilities within the nutrition market and needs Wyeth in order to stay within China’s milk market and to diversify its product range. Unlike Wyeth, Nestle has been the center of numerous Chinese milk scandals, making it one of the most distrusted milk brands in China’s rapidly expanding milk market. But if it acquires Wyeth, it will regain its foothold and become the third largest infant milk provider in China. Wyeth’s research on medical value-added aspects of infant milk will also help Nestle, a purely nutrition focused company, diversify its global product range.

And the deal itself is also looking free of barriers. Deeper pockets have helped Nestle out bid fellow competitors such as Danone. Chinese officials are expected to take a favorable view on the deal to prevent market monopoly. Without surprises then, both parties will soon go home to do what they do best – making drugs and producing milk.

Facebook celebrates Instagram deal, but should they?

Facebook recently announced a billion dollar takeover of Instagram, but the move may prove to be far from wise for its future.

It is obvious why Facebook is interested in mobile apps. It is undeniable that mobile apps are overtaking the internet apps, with more and more users switching from their computers to their phones. People have already started using their mobile phones to help with navigation, play online games, and in fact, do their shopping. This trend is even more significant in social-networking applications, with examples including news blogs and twitting. As such, it may come as no surprise for Facebook’s determination to break into the mobile world. Rival photo-sharing network provider Instagram, with its current 27m user base (with anticipated increase due to its recent incorporation of Android) may therefore look like the perfect choice.

But is paying a price of 9 zeros, almost all of Facebook’s liquid cash flow, a wise deal? Tech startups are heavily dependent upon innovation for customer retention, and burning all its fuel on something that is yet to generate profit may starve Facebook of innovation funds in the short term. And do bear in mind that many tech startups started with just one guy with a good idea (sound familiar Marc?) and a big stroke of luck. And guys with good ideas are in no short supply. One must therefore wonder just how many more acquisitions can Facebook make.

Facebook seems to be trying to kill off major competition before its IPO is complete, but in doing so is placing a huge bet on the absence of major competition in the short term and how their move will be perceived by the public.

Will China's Housing Prices Collapse?

There have been speculations that China’s property market is set for a hard landing, and in fact experts are amazed that the market hasn’t already crashed (http://www.forbes.com/sites/kenrapoza/2012/03/19/china-housing-prices-are-not-collapsing/). But looking deeper into what drives this market, it seems highly unlikely that China’s property prices could fall.

Consider both the short term and long term scenario of China’s housing environment. In the short term, expect some fall in housing prices following strict government regulations. However, difficulties in implementing standards hinders dramatic drop in prices. Take property tax for example, the diversity of the types of property in the Chinese market presents difficulties in implementing a fair tax law. Looking more long term, the government will eventually relax their hold on prices. Investors aware of this are less likely to sell at this stage and instead bet on the near future. Investor confidence is also fueled by China’s increasing urbanization. As a result, demand will remain higher than supply. As long as this does not change, it is unlikely to see massive drops in housing prices.

Photo from http://www.fdc.com.cn/