Merger talks between SBH and GLX still alive:
The Wall Street Journal Interactive Edition -- March 9, 1998
Institutions Refuse to Give Up
On Glaxo-SmithKline Merger
By STEPHEN D. MOORE
Staff Reporter of THE WALL STREET JOURNAL
After round one, it's too close to call in the tug-of-war between big U.K.
institutional investors and pharmaceutical titans Glaxo Wellcome PLC and
SmithKline Beecham PLC.
Despite the acrimonious collapse of merger talks two weeks ago between
the British drug giants, many U.K. pension funds, insurers and mutual-fund
groups refuse to give up on the idea of a $70 billion corporate marriage,
one that would create the world's most powerful drug maker in the biggest
corporate transaction ever. Indeed, many big U.K. investors are prodding
Glaxo to mount a hostile bid for SmithKline in the event the drug
companies can't agree on the allocation of top management posts.
"It's amazing. You've got the City [London's financial district] telling Glaxo
to go for it -- which is very unusual, and might be enticing," sighed a senior
European pharmaceutical executive.
Last week, Glaxo Chairman Sir Richard Sykes and SmithKline Chief
Executive Jan Leschly each huddled in London with roughly a dozen big
institutional shareholders -- trying to explain what went wrong with the
merger plan and where each company is going. Some analysts expected
Sir Richard to take the opportunity to drum up support for a potential
hostile strike. However, according to a fund manager who met with Sir
Richard, the Glaxo chairman avoided direct discussion of a hostile assault.
'Keep Up the Pressure'
"Both companies were attempting to convince institutions that they are
capable of going it alone," the fund manager added. "The problem is that
most institutions are convinced that the merger benefits are real and
achievable -- and having scented blood they're going to keep up the
pressure to get a deal done."
Judging from the market reaction, SmithKline is beginning to look
vulnerable. On Thursday, SmithKline shares bucked a weak London
market and jumped 5.8% to 780 pence ($12.74), up 43 pence. On
Friday, the stock climbed a further 3.6%, or 28 pence, to 808 pence, up
6.3% on the week. Traders said the price surge Thursday and Friday -- in
heavy volume -- was fueled by heavy U.S. buying, apparently by
speculative investors betting on an imminent hostile bid.
Glaxo stock spurted 34 pence on Friday, to 16.56 pounds, but still ended
the week down 2.6%.
In the wake of failed merger talks with American Home Products Corp. as
well as Glaxo, "SmithKline has put its cards on the table and admitted it
doesn't see its future as an independent company," said Rodger McNair, a
fund manager with Friends Ivory & Sime, a Scottish investment group.
"It's just a little bit too small to compete in the global arena and will have to
pursue the merger route."
Mr. McNair will join dozens of other Scottish fund managers in Edinburgh
Tuesday for a lunch conference with Sir Richard. The session promises to
be a key test of Sir Richard's chances to deflect pressure from
shareholders who want the Glaxo chief and Mr. Leschly to return to the
bargaining table and deliver the merger they originally outlined.
(Mr. Leschly flew back to the U.S. from London on Friday -- and will
devote much of this week to SmithKline's biennial management conference
in Palm Springs, California. Sir Richard plans to head to the U.S. next
week for meetings with some of Glaxo's big U.S. shareholders.)
Mutual Benefits
Like many U.K. institutions, Mr. McNair's fund holds stock in both
companies and prefers a merger because it "would allow all shareholders
to benefit in the synergies and cost savings that come through for the
combined business. In the event of a hostile bid, an awful lot of that value
would have to be given away in the form of a premium, so SmithKline
shareholders would be reaping the majority of the benefits," he added.
At this stage, Mr. McNair mused, the odds of a merger being revived "are
maybe 50/50 and hopefully the odds of a hostile bid significantly less. But
it's quite a close call."
With so much at stake, the choice of the institutions' tactics is crucial -- yet
there's growing skepticism about chances of an open rebellion where
shareholders would join forces to vote out current SmithKline and Glaxo
directors unless they accede to a merger. Indeed, some big institutional
investors spurned the chance to talk with Sir Richard or Mr. Leschly last
week, preferring to take their complaints directly to nonexecutive directors
on both boards.
That's the traditional way of solving disputes among London's cozy,
old-boy network where self-regulation -- rather than litigation -- prevails.
In theory, lobbying behind closed doors makes it easier for directors to
change their minds and admit mistakes -- potentially a major hurdle in this
case because both boards unanimously approved opening merger talks, as
well as ending them. |
