City voices fury at collapse of Glaxo merger
More than pounds 13bn wiped off combined value of pharmaceuticals giant and SmithKline Beecham as world's largest corporate deal disintegrates
Wednesday 25 February 1998
The collapse of the deal, which would have created the world's biggest drugs group and the third biggest global company, saw Glaxo Wellcome's shares slump by almost 13 per cent to 1657p, while SmithKline Beecham's stock fell more than 10 per cent to 724p.
The failure of the two companies to complete the merger after clashing over the question of who would run the company stunned the City but also drew widespread criticism from institutional shareholders and analysts.
Large investors warned that both companies now had a major task on their hands to rebuild shareholder confidence, particularly SmithKline, which had already called off a merger with American Home Products, the US drugs group, last month to broker a deal with Glaxo.
"It is very unfortunate that in the middle of a deal you have to change tack. It suggests that the two sides had not fully understood and communicated with each other before rushing headlong into a deal which is not the best course of action," said one large shareholder in the two drugs groups.
Another fund manager said: "This damages the credibility of both groups. SmithKline have already jilted the bride to run off with the best man. Now they are cannot even get it together with the best man. We want to know more about the real reasons for the collapse in the talks."
The collapse of the deal became inevitable after the two sides clashed at a meeting in New York last Friday over the respective roles of its five-man executive board and the apportionment of senior management jobs between Glaxo and SmithKline personnel.
Under the deal Sir Richard Sykes, the Glaxo chairman, would have become executive chairman of the merged group and Jan Leschly, chief executive of SmithKline, its new chief executive. The other executive members would have been Glaxo's chief executive, Bob Ingram, and its finance director John Coombe and SmithKline's chief operating officer, Jean Pierre Garnier.
Mr Leschly would also have been chairman of a larger executive committee. But it emerged that its powers would have been limited with Sir Richard wanting to remain in charge of all major strategic decisions. Likewise, the two sides were unable to agree on whether Mr Garnier or Mr Ingram would be chief operating officer or the division of roles in the next tier of management.
Glaxo executives also questioned why there should be a 50:50 split of management jobs when SmithKline's pharmaceutical sales were only 55 per cent of Glaxo's. There also appears to have been a growing realisation on the part of Glaxo that the cultures of the two groups were incompatible. Glaxo operates as a decentralised organisation with authority and responsibility devolved to regional and divisional heads while SmithKline is driven very much from the centre.
Nevertheless, institutional shareholders were aghast that these differences had not been ironed out before the two sides disclosed their merger talks three weeks ago, stating that respective valuations and the division of top jobs had already been agreed.
"I am very perturbed that companies of this stature with experienced management teams could not put a deal together. If it is about jobs for the boys then I would have expected more from both groups," said one.
Tim Franklin, pharmaceutical analyst at Greig Middleton said: "This is a major disappointment. Both companies are under pressure to do something to maintain investor confidence."
Analysts also speculated that Glaxo may have wanted to force the disposal of SmithKline's healthcare division, which it considered to be far less important than its pharmaceutical arm, while there were also question marks over DPS, SmithKline's troubled US pharmacy benefit manager.
"You never know what nasties they discovered when they started to look at each other closely," said an institutional shareholder.
SmithKline and Glaxo now intend to launch separate charm offensives on the City over the next few days and weeks to calm investor fears and try and salvage their reputations.
The collapse of the deal robs several senior executives of huge payouts and the City of at least pounds 100m in fees. Mr Leschly alone stood to make a paper profit of more than pounds 17m from UK and US share options.
However, it will save thousands of jobs among the 21,000 UK workforce of the two companies. Roger Lyons, general secretary of MSF, the white collar science union, said: "This is great news. The company ignored the interests of its employees and anybody else. Now it seems that five executives have fallen out over the division of the spoils and perhaps the group's strategy."
The rationale for the merger was to create a research and development powerhouse with annual expenditure of more than pounds 2bn a year. SmithKline has poured money into genomics, a process designed to identify hundreds of compounds that could be used to develop drugs. This technology was supposed to have fitted neatly with Glaxo's advanced screening techniques, which analysts believe could have lead to the development of a vast array of new drugs.
One analyst said: "I would rather the two groups walk away than proceed with a turkey. When you add a poor drugs pipeline with another poor pipeline then you get an even bigger poor drugs pipeline."
Outlook, page 21
20 Jan: SmithKline Beecham announces it is in merger talks with American Home Products
24 Jan: Glaxo chairman Sir Richard Sykes telephones Jan Leschly, chief executive of SmithKline, and asks whether it would be interested in a merger with Glaxo instead
27 Jan: Sykes flies to New York and meets Leschly in the Rockefeller Center, headquarters of SmithKline's advisers Lazard Freres, to thrash out a deal
30 Jan: SmithKline breaks off negotiations with AHP and announces it is in merger talks with Glaxo. Respective valuations and top management of combined group agreed in advance
17 Feb: SmithKline reports 7 per cent rise in pre-tax profits for 1997 and says it expects to announce the Glaxo merger in early March
19 Feb: Glaxo reports 9 per cent drop in 1997 profits but makes no comment on the progress of the merger talks
20 Feb: Sykes meets Leschly in New York and says Glaxo is not prepared to proceed on the previously agreed terms
22 Feb: SmithKline chairman Sir Peter Walters and Glaxo deputy chairman Sir Roger Hurn meet in London in attempt to rescue the merger
23 Feb: SmithKline terminates merger talks, citing `insurmountable differences' with Glaxo over management philosophy and corporate culture
24 Feb: Glaxo and SmithKline shares plunge 13 per cent and 10 per cent respectively as recriminations begin and the City vents its anger
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