Here's what the NY Times had to say:
January 21, 1998
SmithKline and American Home Are
Talking of Huge Drug Merger
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By DAVID J. MORROW
nding a week of market speculation, SmithKline Beecham P.L.C.
and the American Home Products Corporation confirmed
yesterday that they were considering the largest corporate merger ever.
The two companies, which make some of the world's best-known drugs
-- from SmithKline's Tums to American Home's Advil painkiller -- would
form the world's largest pharmaceutical and health products company,
with combined sales of some $26 billion. A merger would also be closely
watched by consumers who bought American Home's diet drugs --
one-half of a cocktail known as fen-phen that is no longer on the market
-- and have sued over possible health complications.
Wall Street reacted giddily to the news. Shares of American Home,
based in Madison, N.J., closed yesterday at $94.25, up 17 percent,
while the American depository receipts of the London-based SmithKline
rose 4 percent, to $59.5625. Talk about a merger helped lift the overall
market, with the Dow Jones industrial average rising 119.57 points, and
drug stocks particularly soared. Merck was up $5.75, closing at
$115.50, while Warner-Lambert finished at $138.25, up $9.125, to
name a few.
As excited as investors were, the brouhaha may be for naught. Even
though SmithKline and American Home confirmed that discussions were
under way, both companies said there were no assurances a deal would
be reached.
Even so, analysts were confident that the mere glint of a possible
megamerger would be enough to set off another spree of acquisitions
among the giant pharmaceutical companies. American Home itself spent
$9.7 billion for the American Cyanamid Company, the maker of Centrum
vitamins and Fibercon laxatives, only four years ago and $800 million for
the A. H. Robins Company in 1987.
Novartis A.G., the industry heavyweight with $24.3 billion in worldwide
sales, was created when Sandoz and Ciba-Geigy paired off in 1996.
This latest pairing, however, could make those deals seem tiny by
comparison. With both companies already fetching well above $60 billion
apiece from investors as stand-alone entities, a combination is likely to
dwarf even the $41.9 billion deal that Worldcom offered to acquire the
MCI Communications Corporation in October.
"Mergers come in waves," said Mark Becker, a European
pharmaceuticals analyst for J. P. Morgan Securities Ltd. in London. "The
global pharmaceutcial industry is like a chess game. When one player
makes a move, there has to be a response. On top of that, mergers tend
to happen two years before patents expire. And a lot of drugs will lose
their patents in 2000 and 2001."
Rumors of an impending deal by SmithKline and American Home had
been floating on two continents ever since volume in American Home's
stock spurted on Jan. 12. But it was not until yesterday morning, long
after its own stock had moved sharply in London on Friday, that
SmithKline chose to confirm that discussions were being held. American
Home, known for safeguarding its privacy -- even to the point of being
called Anonymous Home Products by industry consultants -- also
relented and issued a confirmation later in the day.
Once the talks were disclosed, analysts spent much of yesterday
handicapping the deal. One problem appears to be the slight difference in
market capitalization, since the deal is likely to be an exchange of stock,
rather than cash. In such deals, the company with the higher value is likely
to be seen as the acquirer. At yesterday's close, American Home was
worth about $61 billion and SmithKline about $65 billion. The gap was
as large as $7 billion before all the rumors began.
"The two companies want to approach this as a marriage of equals," said
Steven Tighe, an analyst at Merrill Lynch. "Some of the difference in
market cap was corrected yesterday as American Home Products' stock
rose. They won't want to have a minority share in the deal."
Antitrust regulators are unlikely to scrap the deal, analysts believe.
SmithKline and American Home have extensive cardiovascular drugs and
overlapping vaccines, but those problems could easily be solved if the
companies dropped projects or sold off some businesses.
Many analysts see a deal as an instant way to transform two large
companies into a more powerful competitor.
In the pharmaceutical industry, size has almost become a proxy for
competitiveness. Merging drug companies can, for instance, gain
marketing strength against health maintenance organizations.
SmithKline and American Home might get other advantages by pooling
their resources.
For one, the $1 billion that they each now spend on research and
development lags behind what most of their major competitors spend.
Novartis spent $1.9 billion on research and development last year and
Glaxo Wellcome, $1.8 billion.
SmithKline and American Home also boast strong product pipelines but
neither has an ideal way to deliver its wares to market, especially
compared with the impressive sales forces in place at competitors.
A merger would also help American Home solve its succession problem.
John R. Stafford, the 60-year-old chairman and chief executive, had his
prostate removed in November and is believed to want to retire. Fred
Hassan, a former American Home senior executive, was a likely
successor until he left the company last year to join the Pharmacia &
Upjohn Company.
That leaves Jan Leschly, SmithKline's 57-year-old chief executive, as the
likely chairman of the merged company. A former world-class tennis
player, Mr. Leschly took over at SmithKline in 1994 and began a series
of billion-dollar acquisitions.
Despite being separated by an ocean, SmithKline and American Home
share similar histories. American Home's drug-making division,
Wyeth-Ayerst Laboratories, began in 1860, when John Wyeth and his
brother Frank established a drugstore in Philadelphia. Over the years,
American Home got into other industries, notably food, until it divested
itself of 80 percent of that business in 1996 for $1.24 billion.
SmithKline Beecham was created in 1989 when SmithKline of
Philadelphia merged with Beecham Group of Britain. The maker of
Geritol vitamins, SmithKline dates to 1830, when John K. Smith opened
a Philadelphia drugstore.
Still, this merger may have a few glitches, and some analysts were
surprised that SmithKline would consider hitching itself to American
Home, a company prone to product mishaps. The mistakes have been so
severe that the liabilities from lawsuits could easily exceed $2 billion.
Two years ago, sales of Amrican Home's Norplant contraceptive device
dwindled after women complained that it caused depression and ovarian
cysts from silicon poisoning. Lawyers quickly lined up to sue the
company.
Then, last September, the company recalled two diet drugs, Redux and
Pondimin, one-half of the combination known as fen-phen, at the request
of the Food and Drug Administration, after studies showed the pills could
cause heart damage. At last count, people who had taken the drugs had
filed some 300 lawsuits against the company.
"You have to wonder what SmithKline could be thinking with those
liabilities from the lawsuits looming around?" said Dave Jones, an analyst
with the Overpriced Stock Service in Half Moon Bay, Calif. "You just
have to believe that they've done some due dilligence and know what
they are in for."
It is unlikely, too, that this deal would mean more jobs for the English or
New Jersey countrysides. Each company has close to 60,000
employees, with the most serious overlap probably in their consumer
products divisions. That could mean a substantial downsizing.
"If this merger comes together, I'd expect them to reduce their combined
staff by 10 percent to 20 percent over three years," said Neil Sweig, a
pharmaceutical analyst at Southeast Research Partners.
"Investors have to remember that this deal is far from finished yet," Mr.
Sweig said. "I give it a 50-50 chance. And at where these stocks are
trading, most of the appreciation of the deal is already being reflected in
the prices." |
