February 25, 1998
Glaxo, SmithKline Stun Investors
With Cancellation of Big Merger
Failure of $70 Billion Deal Drives Shares Down,
Tarnishes Reputations of Firms' Executives
By ROBERT LANGRETH and STEVEN LIPIN
Staff Reporters of THE WALL STREET JOURNAL
Glaxo Wellcome PLC and SmithKline Beecham PLC saw nearly $19
billion of their stock-market value vanish Tuesday in the clash of two
corporate egos.
SmithKline jolted investors late Monday with a scalding public statement
that it had canceled its hoped-for $70 billion merger with Glaxo. The
combination of British drug giants, which would have been the largest
merger ever, foundered not on strategic or financial shoals but on
unresolvable conflicts in the executive suite between two of the drug
industry's most flammable personalities.
By the end of New York Stock Exchange
trading Tuesday, Glaxo's ADRs plummeted
11%, a decline of $12.3 billion, while
SmithKline's fell 9%, a drop of $6.6 billion.
And the credibility of both drug makers -- and
of their top executives -- was deeply
tarnished.
While many big proposed mergers founder on
issues of corporate control, few wind up as
publicly nasty as the collapse of the
Glaxo-SmithKline courtship. In its unusually
blunt statement released after markets closed
Monday, SmithKline accused Glaxo of
reneging on "agreed arrangements."
Drug Giants Are Left Vulnerable
The scuttled deal leaves both drug giants
vulnerable and still in need of deep-pocketed
partners. SmithKline has spent much of the
past year searching for a suitable mate, flirting first with Glaxo, then with
American Home Products Corp. and then reviving the effort to join up
with Glaxo. Now that SmithKline's chief executive, Jan Leschly, has
walked away from these two highly publicized merger efforts, he may find
other would-be suitors elusive and reluctant.
"Can SmithKline survive without a merger? Yes," says Hemant Shah, a
drug-industry analyst in Warren, N.J. "But whether they can prosper is
uncertain."
Traders pounded both companies' stocks. In Big Board trading, Glaxo's
American depositary receipts fell $6.9375 to $55.50, while SmithKline's
ADRs slumped $6 to $60.
The surprising collapse of the merger talks came three days after Glaxo's
tough-talking chairman, Sir Richard Sykes, and two associates flew to
New York City with an ultimatum. There, in a face-to-face meeting in a
Glaxo-owned apartment in Manhattan, the Glaxo triumvirate told
SmithKline's Mr. Leschly and his No. 2, Jean-Pierre Garnier, that Glaxo's
board wouldn't accept parts of the tentative agreement made public Jan.
30. Simply put, Glaxo no longer wanted to hand over the chief executive
spot of the combined company to SmithKline's Mr. Leschly. Glaxo
demanded, moreover, that its managers wind up running almost every
major operation of the combined company.
Mr. Leschly balked. "Leschly was incredulous," says a person close to
SmithKline. "It was one of the most bizarre episodes any of us had ever
seen." People close to SmithKline's leadership said the company's brass
and its board felt blindsided by Sir Richard's action.
Indeed, during the weekend, as SmithKline's board tried to persuade the
Glaxo contingent to adhere to its original agreements, SmithKline
executives began to realize that Glaxo was determined to control the
destiny of the future company despite the original agreement to fully share
management decisions. "They were treating it like an acquisition, but
without paying us a premium," complains one person close to SmithKline.
Neither Glaxo nor SmithKline would publicly comment Tuesday.
Differing Versions
People familiar with the Glaxo side of the dealings depict a sharply
different version of events. They say that in the three weeks after the talks
were disclosed, SmithKline's Mr. Leschly and his team grew so aggressive
in pressing for more power that Glaxo brass grew worried that it was
getting involved in what might become a reverse takeover. Sir Richard
"had a gradual recognition" that proceeding "just wasn't right," one person
says.
"The two companies' approaches to managing some of the basic aspects
of the business were further apart than people anticipated," said a person
close to Glaxo. "The contrast between the two companies' management
styles became clearer and clearer as time went on and caused ripples of
concern among Glaxo's senior management."
Sir Richard began to fret that the value of the merger wouldn't materialize
under the management structure that SmithKline was pushing. On
Thursday of last week, he called his SmithKline counterpart and told him
they must meet. At that meeting, Sir Richard, Glaxo Chief Executive
Robert Ingram and its finance director, John Coombe, faced off against
SmithKline's Mr. Leschly and his deputy, Mr. Garnier.
SmithKline executives felt misled by Glaxo from the beginning and
suspected that Sir Richard had never intended to relinquish control, a
person close to SmithKline said. The SmithKline side tried to persuade the
Glaxo chairman to change his mind over the next two days, but no one
could put the deal back together.
Deals often founder on such nonfinancial issues -- and many failed deals
are simply not disclosed because most mergers are negotiated in a veil of
secrecy. And Glaxo isn't the first company that changed gears on terms
that had been agreed to upfront.
'Social Issues'
But in big mergers, often the trickiest component that must click before
almost anything else is who gets to run the show. In Wall Street parlance,
the dance over the top slots in big mergers is euphemistically called by deal
makers the "social issues." That typically means the top slots, the name of
the company and in what city the new company will be domiciled.
"In strategic mergers, the social issues are the whole game," said Robert
Kindler, a takeover attorney at the New York law firm Cravath, Swaine
& Moore. "Mergers that make significant strategic sense simply don't
happen unless the social issues are resolved upfront."
Now that their courtship has collapsed, SmithKline needs to find a new
partner, but prospects are few. Few other major drug companies that look
like strong merger candidates also possess aging chief executives who
might be eager to give up control and let Mr. Leschly run the show. And
with drug company stock prices sky-high, a hostile takeover of any major
drug company would be difficult or impossible.
SmithKline needs to partner-up because two of its top-selling drugs -- the
antibiotic Augmentin and the arthritis drug Relafen -- will lose patent
protection in 2002. Meanwhile, SmithKline's research pipeline offers few
major new products in the short term, analysts say, as two promising test
drugs haven't lived up to expectations. And the company's research costs
are rising faster than sales growth, presenting another squeeze.
Glaxo also faces growth problems. It has had trouble replacing its
blockbuster ulcer medication, Zantac, whose patent expired last year. An
experimental hepatitis drug that was supposed to be a strong product has
been delayed because of problems in clinical trials. In addition, the recently
introduced successor to Glaxo's best-selling herpes drug Zovirax, which
last year lost patent protection, hasn't met analysts' sales expectations.
Still, despite its anemic earnings growth, the company is hugely profitable
and thus faces no immediate pressure to perform another deal.
-- Stephen D. Moore contributed to this article.
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