Benefits of a Failed Monsanto/American Home Merger: David Pauly
Bloomberg News
October 13, 1998, 4:23 p.m. ET
Benefits of a Failed Monsanto/American Home Merger: David Pauly
New York, Oct. 13 (Bloomberg) -- Cancellation of the
Monsanto Co. and American Home Products Corp. merger is a good
deal for shareholders.
That seems cruel considering that Monsanto and American Home
shares fell about 27 percent and 10 percent, respectively, today
when the companies called off their marriage.
But shareholders of both drug companies should remember that
study after study shows that most mergers fail -- because of high
prices paid, for instance, or because promised cost cuts failed
to materialize.
In this case, corporate egos also were involved. The deal
died when it became clear that the plan for Monsanto's Robert
Shapiro, 60, and American Homes' John Stafford, also 60, to run
the new company as co-chief executives wouldn't work, according
to an investment banker and a lawyer close to the negotiations.
This is the second time this year that American Home merger
negotiations foundered on dispute over who would run the
consolidated company. Last January, the other party was Britain's
SmithKline Beecham Plc.
Add warring co-CEOs Shapiro and Stafford to the always
dangerous merger mix and you could have had disaster for both
American Home and Monsanto shareholders. Of course, the whole
idea of co-CEOs is absurd.
Though they suffered more, Monsanto shareholders also may
benefit more from the merger's cancellation.
Disparity
This didn't seem to be a merger of equals. Based on share
prices in relation to earnings, investors had valued Monsanto far
more highly than American Home. St. Louis-based Monsanto has
focused on its relatively new business of genetically altered
seeds that resist herbicides and pesticides. It also has a new
arthritis drug that analysts say could be a blockbuster.
American Home has twice Monsanto's sales and its Premarin
hormone drug is a big seller. But the company recently had to
withdraw two diet drugs, Redux and Pondimin, from the market and
it also sells over-the-counter drugs like Advil, which are highly
dependent on advertising.
While the seed business is a bit of blue sky in Monsanto's
future, its past clearly was better than American Homes'. In the
last five years, Monsanto's total return to shareholders, market
gains plus dividends, was 350 percent, compared with American
Home's total return of 297 percent.
One of the purported benefits of the merger for Monsanto was
that American Home would serve as a distribution vehicle for new
Monsanto drugs. But earlier this year Pfizer Inc. agreed to help
Monsanto market its arthritis drug, which still needs to be
approved for sale by the U.S. government.
Delayed Decline
If it's any consolation to Monsanto shareholders for today's
huge loss, they are no worse off than stockholders generally
these days. Most investors and analysts approved of the merger --
the consensus was that bigger was better -- and its prospects
helped hold up Monsanto shares when the rest of the market tanked
starting in July. Monsanto shares now are down about 40 percent
from their Aug. 25 price -- and many good stocks are been hit
that hard.
Since all mergers are iffy and Shapiro and Stafford couldn't
get along, American Home shareholders also are better off single.
Furthermore, under the merger terms, American Home's earnings
would have been lowered in both 1999 and 2000.
Nobody was a winner when Monsanto and American Home
announced their merger plans. Now both companies get a chance to
start over.
--David Pauly in the New York newsroom (212 318-2319) with |
