PHARMA GIANT: Warner Rejects Pfizer Bid, Goes with AHP
Pfizer Inc., the nation's second-largest pharmaceutical company, yesterday launched an unsolicited $82.4 billion bid to buy Warner-Lambert Co., just hours after Warner-Lambert and American Home Products Corp. had agreed to merge. The "knockout bid" topped the $72 billion in stock offered by AHP (Shaw, Philadelphia Inquirer, 11/5). According to Bloomberg, Warner-Lambert rejected the offer early this morning; said one analyst, "It's pretty evident that Warner's management would prefer to deal with American Home because they get to run the show, rather than basically get swallowed up by Pfizer" (Finkle, 11/5). Pfizer may nonetheless be "in play" for an expected flurry of mergers and buyouts in the industry (Knox/Galewitz, Associated Press, 11/5). The bid, which "shocked Wall Street" yesterday, would have given Warner-Lambert shareholders 2.5 shares of its stock, or $93.13 at Thursday's closing price, making the deal worth $82.4 billion -- 13% more than American Home Products' offer of $72 billion. The combined Pfizer-Warner firm would have had revenues of $28 billion -- $2 billion more than the AHP/Warner venture. Either combination would create the world's largest pharmaceutical company. At the same time, Pfizer Chair and CEO William Steere, Jr. filed suit in the Delaware Court of Chancery seeking to block certain "poison pill" provisions that would impede Pfizer's ability to close the deal. Under the terms of the AHP/Warner-Lambert merger agreement, if either company pulls out of the deal, it would have to pay up to $2 billion in fees and issue stock options equivalent to 20% to the other company (Jacobs, Los Angeles Times reports. 11/5). Analysts agree that the provisions would make it extremely difficult for Pfizer to go through with the proposal. But Pfizer -- maker of blockbusters Viagra and Zoloft -- is seeking "to assemble a sprawling research operations that could become a scientific juggernaut."
After Warner-Lambert's board meeting last night, the company said it was "not in a position at this time to take any action with respect to the Pfizer proposal." Although Warner Chair Lodewijk J.R. de Vink said he was "very surprised" at the counteroffer, Pfizer's Steere has been courting the company over the last month. Moreover, Pfizer already has ties to Warner-Lambert's "cash cow" cholesterol drug Lipitor through a joint Lipitor marketing agreement. But de Vink appears disinclined toward the Pfizer bid, stating, "We made a clear decision to do this deal [with American Home Products]." Some industry analysts expect a bidding war between Pfizer and American Home (Lipin/Langreth/Harris/Deogun, Wall Street Journal, 11/5). Banc of America Securities Analyst Len Yaffe notes, "I would be surprised if the bid Pfizer put on the table was the last one" (AP/Investor's Business Daily, 11/05). But the Wall Street Journal reports that Warner-Lambert has very weak takeover defenses -- shareholders can act through "written consent," allowing mail-in proxy contests at any time -- and does not maintain a staggered board of directors, so the entire board can be replaced at one time. P. Schoenfeld Asset Management head Peter Schoenfeld noted that "It'll be very difficult for Warner to fend [the Pfizer bid] off."
The Big Picture
On "NewsHour with Jim Lehrer" last night, PBS' Margaret Warner interviewed Public Citizen's Health Research Group Director Dr. Sidney Wolfe, pharmaceutical and biotechnology analyst Viren Mehta of Mehta Partners, and Francis Palumbo, director of the University of Maryland's Center on Drugs and Public Policy. Mehta said that the pharmaceutical industry "is in the throes of major transformation" driven by expensive new scientific advancement and a push toward globalization, "forcing companies to have large amount[s] of cash flow." Wolfe said, "In less than 10 years, there have been 29 significant mergers in the pharmaceutical industry. ... [But] there's really no evidence that the savings that occur when the mergers are accomplished are being passed on to patients. We're also concerned about the research implications. In a number of these mergers, one of the companies says they don't have any new drugs in the pipeline and therefore they're merging with another one that does. That's true in the case today" (PBS "NewsHour," 11/4). Click here for a transcript of the interview.
Back to the Drawing Board?
As for American Home Products, the Pfizer bid puts the company in a bad spot. Should the Warner merger fall through, it will be the third unsuccessful merger attempt for AHP in the last two years. Last year, AHP failed to complete mergers with Monsanto Co. and SmithKline Beecham PLC (Wall Street Journal, 11/5). Analysts say that American Home acknowledged last month that it could be targeted by a hostile takeover -- Glaxo Wellcome, SmithKline Beecham PLC, Novartis and Merck & Co. have all expressed interest in acquiring AHP. Edward D. Jones & Co. analyst Bob Kirby said, "[The failed merger] would put [AHP] back to where they were, and that's in fear of a hostile bid" (Los Angeles Times, 11/5). The Wall Street Journal reports that the most obvious way for AHP to save Warner merger is to "sweeten its bid." Alternatively, the two companies, relatively equal in size and market cap, could reverse the transaction -- currently AHP is taking over Warner, but Warner could "launch a cash tender offer" to acquire AHP. The reversal would not require shareholder approval, according to takeover experts (11/5).