Marlboro owner’s takeover of Vectura “makes strategic sense”

Bayes Business School M&A expert comments on Philip Morris International (PMI)’s controversial takeover of medical device producer Vectura

Philip Morris International (PMI), the group behind tobacco giant Marlboro has agreed to purchase Vectura, a manufacturer of respiratory and medical machinery.

The deal has come under heavy scrutiny from activists, with the direct link between smoking and respiratory problems leading some to question the motives behind the move. However, Dr Valeriya Vitkova, Research Fellow at the Mergers and Acquisition Research Centre (MARC) at Bayes Business School (formerly Cass), believes the deal should not come as a surprise, given recent market movements.

“If you look at acquisition behaviour from the last two decades, then this does seem rather atypical,” Dr Vitkova said.

“However, if you focus on the most recent trends with high focus on corporate social responsibility and Environmental, Social and Governance (ESG) factors, this deal actually makes a lot of strategic sense.

“Investors are increasingly associating corporate ESG investments with competitive advantages, business resilience and superior financial performance. Some of the largest institutional investors, pension funds and hedge funds have stated their confidence in the ability of ESG to create shareholder value and make firms and markets more sustainable.

“In 2020, there was a record inflow of investor capital in ESG funds, with reports that ESG-focussed equity funds outperformed more traditional equity funds as well. Firms have responded to this by attempting to diversify into products and services – such as medical equipment supplied by Vectura – that are ESG-friendly.

“For companies operating in sectors of the economy that are harmful to human health or the environment, like the smoking industry, this is particularly relevant.

“It is common for investors to either exclude or underweight stocks in the tobacco sector, which is encouraged by anti-tobacco groups like Tobacco Free Portfolios, which aims to reduce and ultimately eliminate all investment in tobacco.

“PMI’s motivation to buy Vectura could be seen as a bold step in an attempt to make the company more appealing to ESG-conscious investors. Additionally, it could be a company approach towards changing strategic direction towards a more sustainable industry, with high growth potentials such as research and development in healthcare.”

Vectura has also come in for criticism following the decision to accept PMI’s approach, but Dr Vitkova believes the move can be beneficial to both parties.

“Philip Morris International has pledged to convert more than 40 million adult smokers to smoke-free products by 2025, and to stop selling cigarettes in many countries over the next 10 to 15 years,” Dr Vitkova continued.

“Converting an arguably controversial business to achieve this ambitious aim is a very bold move.

“Tobacco companies tend to have high cash-generative business models, which means they take high levels of cash without many opportunities to reinvest in research and development to make new products. The acquisition of Vectura could be a sign of PMI’s attempt to use the cash that it generates to break into more ESG-friendly industries, and start to move away from a shrinking tobacco industry.

“If it persists with this strategy and continues demonstrating commitment to incorporating ESG principles in its funding and operations, the payoffs could be significant.

“The major challenge PMI faces is convincing financial markets of its positive intentions. It recently took the decision to issue debt with the promise of lower dependency on cigarette sales in late August this year. With bonds or loans linked to ESG criteria, borrowers set key performance indicators aligned with sustainable development goals. In this instance, the issuer pledges to pay a penalty to lenders if it falls short, so for Philip Morris the goal is clearly to reduce its reliance on the cigarette business.

“This is not to say every ESG-conscious investor will suddenly embrace an industry that has been avoided for decades, but we must acknowledge the efforts made towards improving public health. PMI’s investment of more than $7 billion between 2008 and 2019 to ‘deliver a smoke-free future’, and commitment to dedicate 98 per cent of its research and development spend towards this mission is strategic progress that should not be ignored.”

All quotes can be attributed to Dr Valeriya Vitkova, Research Fellow in the Mergers & Acquisitions Research Centre (MARC) at Bayes Business School (formerly Cass).

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