According to Credit Suisse, immense value would be created if Pfizer Inc. (NYSE:PFE) were to acquire Bristol-Myers Squibb Co (NYSE:BMY). Analysts at Credit Suisse argue that such an acquisition would positively impact the return on capital of Pfizer when the industry average synergies are assumed.

If Pfizer acquired Bristol-Myers Squibb using cash and paid a 25% premium and the pharmaceutical giant was capable of extracting synergies of approximately 30% of the operating expenses of its acquisition, there would be a value of $5 billion created or about $80 per share.

Share issuance

The alternative to a cash deal would be issuance of shares by Pfizer in order to pay for the acquisition. This would be done based on the premise that the dilution that would result from the issuance of undervalued shares would be offset by the value creation that would result. Another alternative would be a part-cash and part-stock deal.

“A deal partially financed with an 18% stock issuance would be a break-even for PFE shareholders,” the analysts at Credit Suisse have estimated.

At present, the most recent filings show that Pfizer has short-term investments and cash reserves totaling $18 billion. Its long-term debt stands at close to $32 billion. This means that Pfizer would need to take on huge levels of debt in order to be in a position to acquire Bristol-Myers Squibb in a cash deal. An approximate figure of about $120 billion is being touted.

Old news

This is not the first time that talk of Bristol-Myers Squibb being an acquisition target are doing the rounds. Part of the reason for this has been the fact that Bristol-Myers Squibb has been struggling lately. Towards the end of last year, the pharmaceutical firm disclosed that its R&D division would be initiating a reorganization effort. This came after Opdivo, its lead PD-1 inhibitor, reached a dead end in a third phase trial. Consequently, this enabled, Keytruda, Merck’s PD-1 inhibitor to widen its market lead. However, Opdivo is still undergoing more clinical trials which still gives it a chance of succeeding.

On Monday shares of Bristol-Myers Squibb Co fell by 0.27% to close the day at $56.04.