Here's the latest from WSJ:
January 21, 1998
SmithKline and American Home
Have Held Talks About Merger
Many Obstacles Stand in Way
Of Creation of Top Drug Maker
By ELYSE TANOUYE and STEVEN LIPIN
Staff Reporters of THE WALL STREET JOURNAL
SmithKline Beecham PLC disclosed it has held merger talks with
American Home Products Corp., an effort aimed at creating the world's
largest drug company in what would be the biggest corporate combination
in history.
Discussions began in early November but cooled a few weeks later
because of disagreements over price and other issues, according to people
familiar with the matter. The talks aren't dead, but it is unclear how active
any current discussions might be. The possibility of a deal sent both
companies' shares soaring Tuesday, giving American Home a market value
of $61 billion and SmithKline a value of $65 billion.
Numerous obstacles besides price stand in the
way, including huge legal liabilities involving
American Home's diet-drug recall and its
Norplant contraceptive. But observers argue
that the disclosure of the on-and-off talks,
required by British regulations, could revive
the courtship or attract new bidders.
Both sides had reached a broad outline on a
management structure that would have seen
American Home's chairman and chief
executive officer, John R. Stafford, start out as the top executive of the
combined company, eventually handing the reins to SmithKline's chief, Jan
Leschly. Mr. Stafford, 60 years old, has dominated American Home for
the past decade, and last May he lost his only possible inside successor to
another company. In late November, after talks with SmithKline had
cooled, Mr. Stafford underwent surgery for prostate cancer, which the
company said was successful.
American Home Shares Jump 17%
American Home, of Madison, N.J., said future discussions with
London-based SmithKline may be held, but both companies warned that a
deal might not be carried out. American Home shares surged $13.5625,
or 17%, to close at $94.25 in New York Stock Exchange composite
trading, while SmithKline's American depositary shares rose $2.5625, or
4.5%, to $59.5625.
A merger would combine two pharmaceutical companies that have long
aspired to premier status but have been eclipsed in recent years by a string
of mergers that produced far larger, richer competitors. SmithKline, the
ninth-largest drug company in drug sales, and No. 7-ranked American
Home were bumped out of the top tier by deals that built Glaxo Wellcome
PLC, Novartis AG, Hoechst AG and still other behemoths.
Now, the two companies seek to attain the huge scale needed to compete
with the giants, cut billions of dollars in overlapping costs and generate the
revenue needed to fund the skyrocketing costs of research and
development. Together, they would be a good fit, analysts noted.
Both companies have strong vaccine businesses -- American Home
bought into that market a few years ago by mounting a hostile acquisition
of American Cyanamid Corp. after learning it was close to a deal with
SmithKline. Their vaccine businesses together may be so strong as to
invite scrutiny by the Federal Trade Commission, should a deal be
reached. SmithKline also makes the hot-selling antidepressant Paxil, while
American Home makes the smaller brand Effexor in that category.
SmithKline also produces anti-infectives Augmentin, Famvir and
Bactroban, while American Home makes less-well-known antibiotics.
American Home is strong in women's products, including Lo/Ovral
contraceptives and the popular menopause drug Premarin. SmithKline's
consumer business boasts well-known brands such as Aquafresh
toothpaste, Nicorette gum and Nicoderm CQ patches in the
smoking-ending segment, and heartburn remedies Tums and Tagamet HB.
American Home's brands are even bigger, with Advil pain reliever,
Robitussin cough syrup, vitamin supplement Centrum and Chap Stick lip
balm.
Concerns About Future
Despite its brand portfolio, SmithKline's Mr. Leschly is said to have
become disappointed with the company's prospects. Its research pipeline,
an investment in genetic technology and acquisition of a
pharmacy-benefit-management company have failed to move SmithKline
into the top ranks of drug makers. Combining with American Home would
give SmithKline the scale and broader product portfolio to compete more
effectively, some analysts said. And a combination would increase the
resources available to push promising new-product candidates through the
research-and-development pipeline.
American Home has 60 promising products in research stages but needs
extra muscle to turn those into successful drug introductions; developing
just one successful launch typically costs more than $300 million.
Rumors about the talks began circulating last week in London, causing
SmithKline's stock price to rise 7% on Friday. Both companies have
proved to be experts at merging with other companies in the past, and
"they've done a very good job," said Jack Lamberton, an independent
analyst.
Still, some observers say the chances of a deal emerging are slim.
American Home's recall of the Redux and Pondimin diet drugs in
September because of reports linking the drugs to heart-valve damage
could pose a liability of $3 billion to $4 billion, well in excess of insurance
coverage estimated at as much as $1 billion. The company also faces more
than 300 lawsuits filed on behalf of tens of thousands of women who claim
injury from Norplant, the contraceptive that is implanted into the upper
arm.
The liability issue was apparently a sticking point in negotiations over price
in the merger talks with SmithKline. People familiar with the situation say
one stumbling block was the question of the "exchange ratio" of a stock
combination -- in effect, how large a stake in the combined company
would go to SmithKline shareholders vs. American Home holders.
Huge Savings Are Seen
American Home is expected to report 1997 earnings of $2.2 billion on
revenue of $14.2 billion, according to Value Line, while SmithKline is
expected to post profit of $1.5 billion on revenue of $13.2 billion. The
combined SmithKline/American Home Products could reap huge annual
savings-as much as $2 billion in cost savings over time, which could help
increase the profit of the combined entity by 20% to 25%, according to
Jami Rubin, an analyst at Schroder & Co.
Such savings would fuel near-term profit growth, according to some
estimates. The combined entity would create a $3 billion
research-and-development budget, far higher than the spending by rivals.
"This company would be a world-beater," said Mark Becker, a
London-based drug analyst with J.P. Morgan. "You'd be fitting together
the strengths of each in a way that would make many of their present
weaknesses disappear."
Birth of a Behemoth?
SmithKline Beecham
American
Home Products
1997
revenue-a
$13.2 billion
$14.2 billion
1997 net
income-a
$1.5 billion
$2.2 billion
No. of
employees
57,000
59,600
Total shares
outstanding
$1.1 billion-b
648 million
Stock's
52-week high
$59.5625
$94.25
Stock's
52-week low
$33.56
$57.00
Major
prescription
drugs
Paxil (anti-depressant),
vaccines
Premarin (for menopause
symptoms)
Major
consumer
products
Tums, Tagamet HB,
Aquafresh, Nicorette gum,
Nicoderm CQ
Effexor (anti-depressant)
Advil, Robitussin, Chap
Stick
a-Estimate b-Based on ADRs traded on the NYSE
Sources: Value Line, Baseline, the companies |
