3:16 ET Monsanto Says Next Step Is To Stick To Life-Sciences
October 13, 1998 3:16 PM
By Gaston F. Ceron
NEW YORK (Dow Jones)--A failed merger with
American Home Products Corp. (AHP) would seem to
leave Monsanto Co. (MTC) scampering around to look
for options. But the company said it plans to stick to its
core life-sciences strategy, without actively seeking
another messy merger.
Earlier Tuesday, Monsanto and American Home said
they were calling off their planned merger. The
announcement confirmed a wave of persistent rumors
about the impending demise of the deal, and came just
days after an American Home spokesman and a source
at Monsanto gave assurances that the merger was on
track.
So what's next for Monsanto? In an interview earlier
Tuesday, Robert Shapiro, chairman and chief executive
of the St. Louis-based company, said Monsanto would
keep plugging away at its strategy to build its dominant
life sciences position. "That's the path we've been on for
the last several years, and that's the path we're on
today," he said.
To Monsanto, life sciences means using technology to
deliver advanced products in agriculture,
pharmaceuticals and food ingredients. And, while the
merger with pharmaceuticals powerhouse American
Home would have strengthened Monsanto's portfolio,
Shapiro is confident Monsanto can maintain its edge in
the field. He promised a number of exciting new
products would be introduced in the near future,
including Monsanto's touted drug for treating arthritis,
Celebra.
To make sure that its strategy won't be overly burdened
by debt, Shapiro said Monsanto may issue equity down
the road, with proceeds going to pay down debt. In
order to finance a string of acquisitions, Monsanto has
taken on more debt than some observers would like.
Including debt used to finance the $2.3 billion purchase
of the 60% of Dekalb Genetics Corp. (DKB) Monsanto
didn't already own, the company's debt would reach
"less than attractive" levels, Shapiro said. The equity
issue, he said, may be made in the form of common or
convertible stock, or a combination of the two.
One obvious other option for Monsanto would be to
pursue another merger partner.
"I think there are other interested parties," said Bob
Goodof, an analyst at Loomis Sayles & Co., which
owns a stake in Monsanto. He noted that market
speculation had previously focused on DuPont & Co.
(DD), although that talk eventually died down. But now,
he theorized, "maybe DuPont comes back and thinks
about it." A DuPont spokeswoman declined to comment
on the matter.
Monsanto, however, doesn't sound anxious to take
another crack at a big merger right now. In an interview
Tuesday, Shapiro conceded that his duty would be to
listen to any proposals that came his way. But Monsanto
isn't leaning toward pursuing anyone on its own. "Right
now," he said, "we've got enough to deal with without
pursuit."
Focusing on execution may be a wise choice. After all,
Monsanto has two large acquisitions still pending, for
seed concerns Dekalb and Delta & Pine Land Co.
(DLP). These deals, Shapiro said, are still on track.
Additionally, Monsanto may decide to sell some
noncore assets, Shapiro said, such as when it agreed to
sell part of its lawn-and-garden business in June. But
Shapiro declined to say what business he would sell.
Cultural Differences Seen An Issue
Cultural differences may have also contributed to the
terminated merger between American Home Products
and Monsanto.
American Home products, the more conservative of the
two, is "very financially controlled" while Monsanto, the
more contemporary outfit, is more into free-spending,
said PaineWebber analyst Jeffrey Chaffkin.
"It's a very tough cultural fit to put together," he said.
Sitting at the helms of their respective organizations,
American Home Chairman, President and Chief
Executive John Stafford and Monsanto Chairman and
Chief Executive Robert Shapiro were tapped to manage
the combined operation.
But while industry observers said the structural
difficulties of the merger are what brought it to a halt,
they said strategic benefits are what originally fueled the
megadeal.
"My sense is that as often happens in many marriages,
the design and blueprint is quite appealing. And then
when managements of companies and divisions within
those companies get together to formulate
forward-looking plans, disagreements occur," said
Lehman Brothers analyst Tony Butler.
The blueprint for this marriage would have combined
American Home, a Madison, N.J. research-based
pharmaceutical and health care products company, with
Monsanto, a St. Louis-based life sciences company
engaged in the worldwide manufacture and sale of a
diversified line of agricultural products, nutrition and
consumer products and pharmaceuticals.
The deal, signed in early June, came amid radical
changes in genetics that are proving to advance findings
in medicine and agriculture.
Through the merger, Monsanto would have gained a
broader base of earnings. In 1997, the company
reported net income of $470 million, including a gain of
$176 million from discontinued operations and a charge
of $455 million on writeoffs. American Home's 1997 net
income totaled $2.04 billion, including a charge of $117
million.
American Home Products stood to gain from
Monsanto's "huge growth opportunities" said Chaffkin.
American Home could have leveraged Monsanto's G.D.
Searle & Co. unit, which sells pain relievers, with its
own pharmaceuticals business. The Food and Drug
Administration in August agreed to give Monsanto's
arthritis drug Celebra priority review. If approved, the
drug will be the first in a new class of enzyme-blockers
called COX-2 inhibitors, and analysts have said it could
garner up to $2 billion in annual sales.
Another benefit to the companies would have been
tremendous cost savings, analysts said, as the businesses
have overlapping operations in the agriculture and
pharmaceuticals.
At the time the merger was signed, the companies said
they expected that within three years the merger would
yield annual cost savings of $1.25 billion to $1.5 billion,
including some from layoffs. |
