How Allergan Could Be Pfizer's Rocket Ship

• Pfizer Inc. PFE confirmed media reports that the company is in talks with Allergan PLC AGN over a potential business combination transaction.
• Pfizer said it is in "preliminary friendly discussions" with Allergan, but offered no assurances that the conversations will end in any transaction.
• Analysts at Credit Suisse and JPMorgan were both constructive on a potential transaction.

Various media sources reported on Wednesday that Pfizer is in talks with Allergan. By Thursday, Pfizer publicly stated that it is in "preliminary friendly discussions" with Allergan in relation to a potential transaction.

Vamil Divan of Credit Suisse commented in a note on Wednesday that it is "important to monitor" the relative market cap of both firms. Pfizer's market cap stands above $215 billion while Allergan's market cap (as of Wednesday) was $113 billion.

Divan said Pfizer's market cap would represent about 65 percent of the combined market cap for the two companies. The analyst noted that a 60/40 split may be required to satisfy last year's U.S. Treasury proposal around tax inversions and this may be possible if a deal occurs at a "reasonable" premium if it were to be heavily equity-based.

Divan also noted that Allergan is one of the few targets that "fit" Pfizer's inversion aspirations. An acquisition of Allergan would add "needed" near-term growth and a "modest" pipeline to Pfizer's innovative business.

The analyst also suggested that an acquisition of AstraZeneca plc (ADR) AZN would offer Pfizer the "best fit" from a "strategic and financial perspective," although it may be difficult to do so following last year's failed attempt.

Finally, Divan argued that "few would be surprised at this point" that Pfizer decides "to go to the inversion route" with its next big transaction.

Shares of Pfizer remain Outperform rated with an unchanged $40 price target.

Shares of Allergan are not rated by the analyst.

JPMorgan: Allergan Can Accelerate Pfizer's Growth Profile

Chris Schott of JPMorgan commented in a note and also views a deal as being favorably.

Schott said an Allergan acquisition would be accretive to Pfizer's innovative business and the broader company. The analyst pointed out that Allergan's growth profile is superior to Pfizer with an expected 9 percent top-line growth from 2016 to 202 versus a 3 percent growth for Pfizer's innovative business and 2 percent growth for the broader Pfizer entity.

Schott continued that an acquisition of Allergan would "likely generate meaningful" operating synergies. The analyst estimated that if a combined entity were to realize cost saving synergies that are in-line with other recent pharmaceutical mergers, a joint Pfizer-Allergan could drive $2 billion of operating synergies over time.

Finally, an acquisition of Allergan would allow Pfizer to re-domicile, a move which is consistent with management's commentary during its earning call earlier this week.

Shares of Pfizer remain Overweight rated with an unchanged $40 price target.

Shares of Allergan remain Overweight rated with an unchanged $400 price target.