How do I handle the recent merger of Pfizer and Wyeth

Posted by oldman on October 18, 2009, 9:59 am

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We have shares in Pfizer and had shares in Wyeth. Wyeth was merged
into Pfizer as follows: .985 shares of Pfizer for each share of Wyeth
plus $33 for each share of Wyeth. When the transaction was announced
the valuation was $50.19 for each share of Wyeth. When the deal
closed on Oct 15 Pfizer closed at $17.66. This change values each
share of Wyeth at $50.66. If I adjust the PFE closing price for the
.985 of a share of PFE then the $17.66 becomes $17.3951.

I am not sure how to handle the cash and stock portions in Quicken
2009. Also not sure whether the closing price for PFE should be the
$17.66 or the $17.3951. Can someone please provide detailed
instructions.

Thanks,

oldman

Posted by R. C. White on October 19, 2009, 12:18 pm

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Hi, Oldman.

That transaction does not fit neatly into any of the wizards in Quicken 2009
because it is an acquisition using both cash and shares of the acquiring
company. And it was not structured by the companies as a non-taxable stock
for stock acquisition. (If you previously held any Pfizer shares, they are
not affected at all by this transaction.)

On the Pfizer website, if you drill down far enough you come to this PDF
document:
http://pfizer.com/investors/shareholder_services/wyeth_transaction.jsp

Then, under Key Merger Documents, click on "Read about the U.S. Federal Tax
Consequences of the Merger" to read a PDF document, which contains this key
paragraph:

"Consequences of the Merger Generally
"The receipt of Pfizer common stock and cash in exchange for Wyeth stock in
the merger generally will be a taxable transaction for U.S. federal income
tax purposes. A U.S. holder of Wyeth stock who receives Pfizer common stock
and cash in the merger generally will recognize capital gain or loss equal
to the difference, if any, between (1) the sum of the fair market value of
Pfizer common stock and cash, including any cash received in lieu of
fractional shares of Pfizer common stock and (2) such holder's adjusted tax
basis in its Wyeth stock exchanged therefor. Gain or loss and holding period
will be determined separately for each block of Wyeth stock, i.e. , shares
acquired at the same cost in a single transaction, exchanged in the merger.
Any capital gain or loss will be long-term capital gain or loss if the U.S.
holder's holding period for its Wyeth stock is more than one year at the
time of the merger. Currently, long-term capital gain for non-corporate
taxpayers is taxed at a maximum federal income tax rate of 15%. If the U.S.
holder has held its Wyeth stock for one year or less at the time of the
merger, any capital gain or loss will be short-term capital gain or loss.
The deductibility of capital losses is subject to certain limitations. A
U.S. holder's aggregate tax basis in its Pfizer common stock received in the
merger will equal the fair market value of such stock at the effective time
of the merger, and the holder's holding period for such stock will begin on
the day after the merger."

Note the key phrase, "...will be a taxable transaction..." This means that
you SOLD your Wyeth shares. Despite Pfizer's use of ambiguous terminology
("acquired Wyeth in a cash and stock merger"), this is an acquisition, not a
merger, in my (non-professional) opinion. Your total sale price was the
cash plus the fair market value of the Pfizer share(s) that you received;
this is defined in the "(1)" phrase in the quoted paragraph. It's easy to
determine the value of the cash, of course; that's $33 per Wyeth share you
held. But you probably also received some additional cash, representing the
value of any fractional shares of Pfizer that you were entitled to, but for
which you received cash in lieu of the fractions. Another PDF document on
the Pfizer site, "Review Answers to Frequently Asked Questions", explains
(in Paragraph 2) how Pfizer calculated that the fractional share values
would be based on $16.836 per Pfizer share. Note that this is NOT the same
formula as for valuing and calculating your tax basis in the whole shares
you received; see the final sentence of the paragraph I quoted above. Your
cash proceeds are based on values for days BEFORE the transaction; your
basis in the whole shares is the fair market value of PFE immediately AFTER
the acquisition. I've not seen an "official" statement, so I'll use the
$17.66 you mentioned.

So, if you held 100 Wyeth shares, you would be entitled to $3,300 cash, plus
98.5 shares of Pfizer. Since they would not issue fractional shares, your
.5 share of Pfizer would be converted to .5 x $16.836 = $8.418, rounded to
$8.42. So your total proceeds would be:
1. Cash for 100 WYE ($33 x 100) $3,300.00
2. Cash for .5 PFE 8.42
Total Check 3,308.42
3. 98 whole PFE shares @ $17.66 1,730.68
Total Proceeds of Sale $5,039.10

In effect, you sold 100 shares of WYE for $5,039.10 and bought 98 shares of
PFE for $1,730.68, or $17.66 per share. You should report the sale of WYE
as though you sold the shares for $5,039.10 cash. No need to report the
acquisition of PFE at this point, but when you sell these 98 shares, you
will use $17.66 per share as your basis and October 16, 2009 (the day after
the merger) as your acquisition date.

As I've often mentioned in this newsgroup, I've been retired for nearly 2
decades and tax rules change daily. So be sure you check with your own CPA,
rather than rely on my out-of-date memory.

RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP
(Using Quicken Deluxe 2009 and Windows Live Mail in Win7 x64)

> We have shares in Pfizer and had shares in Wyeth. Wyeth was merged

> into Pfizer as follows: .985 shares of Pfizer for each share of Wyeth

> plus $33 for each share of Wyeth. When the transaction was announced

> the valuation was $50.19 for each share of Wyeth. When the deal

> closed on Oct 15 Pfizer closed at $17.66. This change values each

> share of Wyeth at $50.66. If I adjust the PFE closing price for the

> .985 of a share of PFE then the $17.66 becomes $17.3951.

> I am not sure how to handle the cash and stock portions in Quicken

> 2009. Also not sure whether the closing price for PFE should be the

> $17.66 or the $17.3951. Can someone please provide detailed

> instructions.

> Thanks,

> oldman