Here's what WSJ had to say today:
February 24, 1998
SmithKline, Glaxo End Talks
Amid Management Concerns
By ROBERT LANGRETH and STEVEN LIPIN
Staff Reporters of THE WALL STREET JOURNAL
SmithKline Beecham PLC broke off merger talks with Glaxo Wellcome
PLC because of differences over who would manage the combined
company, scuttling what would have been a $70 billion deal, the largest in
history.
SmithKline, in a statement, said that Glaxo officials reneged on the
previously agreed terms of the deal in discussions last Friday. Glaxo
declined to comment. The two drug giants had stunned the industry by
announcing Jan. 30 that they were in detailed negotiations to merge.
People close to SmithKline said Glaxo
demanded last-minute changes in the terms of
the merger and in the management structure.
Rather than give in to Glaxo's demands,
SmithKline chose to walk, the people said.
The collapse of the merger raises new
concerns over each company's ability to
develop the next generation of blockbuster
drugs, and compete effectively against
aggressive research juggernauts such as
Merck & Co. and Pfizer Inc.
SmithKline, in particular, has invested heavily
in new gene-sequencing technologies that
have identified numerous new drug targets. But it is believed not to have
the resources to develop all of them on its own. Glaxo has a huge research
operation, but the company has struggled to expand rapidly in the wake of
patent expirations for some of its biggest drugs, such as the ulcer
medication Zantac.
The disclosure was the second time in less than a month that SmithKline
has terminated major merger negotiations. Its previous talks were with
American Home Products Corp.
The announcement by Glaxo and SmithKline of merger negotiations last
month sparked significant rises in the company's stocks, as well as a
general drug-industry rally in anticipation of a possible new wave of
mergers. The termination is likely to lead to a sell-off of the two
companies' stocks and possibly those of other drug makers. "Both
companies' stocks will go down," said Hemant Shah, an analyst in Warren,
N.J. In New York Stock Exchange composite trading, SmithKline's
American depositary receipts closed at $66, down 25 cents. Glaxo's
ADRs closed at $62.4375, down 31.25 cents.
In addition to Zantac, Glaxo makes AIDS medications such as 3TC, the
migraine treatment Imitrex and various allergy and asthma drugs.
SmithKline produces the strong selling antidepressant Paxil, antibiotics
such as Augmentin and several smoking-cessation products.
Ironically, the marriage was seen as a perfect combination of executive
skills. Glaxo's chairman, Sir Richard Sykes, is known for his scientific
acumen and tough negotiating tactics. SmithKline's chief executive, former
tennis star Jan Leschly, is known for his marketing and motivational skills.
People close to SmithKline maintained the deal broke apart because
Glaxo, at a meeting last Friday, officially asked for major changes in terms
of the agreement, including who would be chief executive of the merged
company and how many SmithKline officials would be on the combined
company's board.
SmithKline board members were "surprised and deeply saddened" by this
maneuver, said one person close to SmithKline. SmithKline board
members "feel abused," said this person.
SmithKline's board began meeting continuously starting Saturday and
continued round-the-clock into Tuesday morning, first in the U.S. and then
in London. It was during these meetings that SmithKline's board realized
that Glaxo's changes suggested to them that Glaxo now wanted to have a
dominant position in running the new company.
The board felt that Glaxo was essentially trying to acquire them, rather
than enter into a merger of equals as was originally envisioned. Moreover,
people close to SmithKline said that in an effort to make the merger work,
Glaxo tried to offer certain SmithKline executives and board members key
positions in order to gain their support. The gambit was viewed by the
SmithKline board as an attempt to divide and conquer.
In considering the new Glaxo offer, SmithKline officials took note of what
happened when Glaxo acquired Wellcome PLC several years ago in a
hostile takeover. Few of Wellcome's top executives ultimately retained
major posts in the merged company.
The next question: Will Glaxo make the same kind of run at SmithKline?
While Glaxo could always proceed with a mammoth unsolicited bid, Wall
Street takeover professionals downplayed the chances. Besides the sheer
size, the structure of an unsolicited offer could make the use of favorable
accounting treatment very difficult. Still, SmithKline executives are
concerned about the risk of such a bid.
The disclosure of the initial talks led most on Wall Street and London's
markets to believe that little of substance was left to negotiate between the
two parties. After all, the substantive issues -- such as who would run the
combined company and the division of stock ownership between each
company's shareholders -- had been resolved, according to the two
companies.
In particular, the companies had decided that Sir Richard would have been
executive chairman and Mr. Leschly would have taken the chief-executive
post. Glaxo shareholders would have held nearly 60% of the combined
entity, while SmithKline holders would have held the rest.
But given that the two parties rushed basic terms together in a week or so,
there hadn't been time for more serious talks. In effect, despite claiming
that major issues had been resolved when their talks were announced
nearly a month ago, the two sides tried to pull off a $70 billion merger
without getting to know each other all that well.
When SmithKline disclosed that it had terminated talks with American
Home and would proceed to negotiate a merger with Glaxo in January,
American Home was left standing at the altar. Now, SmithKline appears
to be the company veering from one almost marriage to another.
SmithKline's statement blaming Glaxo for the collapse is highly unusual in
corporate deal making, where terse comments are the rule rather than the
exception. Takeover professionals said SmithKline's comments may have
been an attempt to assuage investors' concerns about management.
"They've been to the altar twice, " said Peter Schoenfeld, head of PSAM
LLC, a New York arbitrage firm. "No one seems to be claiming it was
financial issues."
He added, "it appears management issues were the key issues, rather than
financial terms, and everything deteriorated from that."
After the market closed, Glaxo issued a one-sentence news release, saying
the discussions "have been terminated." SmithKline, in contrast, issued a
one-page news release that pinned blame for the collapsed negotiations on
Glaxo and hinted that talks broke down over management issues.
"Discussions reaffirming the agreed key management roles took place on a
number of occasions between parties," the SmithKline statement said.
"However, on Feb. 20, Glaxo indicated it was not prepared to proceed on
the agreed basis... . In discussions since then, and despite considerable
effort on the part of [SmithKline] ... Glaxo has been unwilling to
proceed... . Glaxo's recent conduct of these negotiations has inevitably
strained relations between the two companies." Glaxo refused to respond
to the SmithKline allegations.
--Michael Waldholz contributed to this article. |
