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Is a GlaxoSmithKline plc buyout back on the cards?

Photo: Ian Wilson. Cropped & adjusted. Licence: https://creativecommons.org/licenses/by/2.0/

Merger mania is sweeping the stock market. It seems no company is safe as both domestic and international firms swoop down on venerable targets. There are even rumours that the world’s largest oil company, ExxonMobil is looking to snap up BP for more than £100bn. 

With an appetite for such large deals growing, it’s possible a buyer, or a number of buyers may swoop down on GlaxoSmithKline (LSE: GSK) to break up the business and get their hands on the firm’s lucrative treatment portfolio as well as its world-leading consumer pharmaceuticals division.  

Small by comparison  

Glaxo may be one of the UK’s largest companies, but compared to its international peers, the company looks small. For example, at the time of writing Glaxo has a market value of $102bn, an enormous figure but less than half of peer Pfizer’s market value of $210bn. Swiss peer, Novartis has a market value of just under $200bn and leading the pack is diversified consumer pharmaceuticals company Johnson & Johnson with a market value of $350bn. 

However, it’s unlikely just one of Glaxo’s peers will make an offer for it. A group of companies is more likely to make an offer as Glaxo has so many different business divisions that a buyer may or may not want depending on their individual speciality. Johnson & Johnson might be happy to acquire Glaxo’s consumer arm for example, while Novartis might step in to buy the firm’s vaccines operation.

Is a deal likely?

It’s all very well speculating on who might be willing to buy Glaxo, but the basic question of if a deal is possible or not remains unanswered. Let’s look at the chances.

The collapse in the value of the pound since Brexit has made the firm more attractive as a takeover target. So, from this point of view, a deal is more likely now than ever before. The last time predators were rumoured to be looking at the business was in 2015, when shares in the company were trading at around 1,350p, and the future of the business was more uncertain than it is today. 

Nearly three years on, and Glaxo’s recovery is well under way. Management has reversed earnings declines and this year City analysts expect it to report earnings per share of 111.7p, the highest value since 2011. 

Nonetheless, despite Glaxo’s earnings recovery, in dollar terms, shares in the company have hardly budged since 2013. So, if Glaxo looked to be good value to potential acquirers back in 2015, it must be even more attractive today. 

Paying a premium 

The rumoured offer for Glaxo in 2015 was 1,900p per share, a premium of 41% to the market price at the time. Based on these numbers, an offer for the business today may exceed 2,000p per share, depending on how many companies combine to do a deal.  

Make money not mistakes 

Glaxo is a prime takeover candidate but buying a stock just because it could be bought out is a risky strategy as there's no guarantee a deal will ever actually happen. You should only buy a stock if you believe it has bright prospects as a standalone business. 

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Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK owns shares of ExxonMobil. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.