But while analysts applauded the deal some fund managers are not so sure. Nigel Cope and Andrew Yates report.
Glaxo was the major beneficiary of the market's new "drugs high" with its shares rocketing by 20.7 per cent to 1983p The surge added pounds 12bn to the company's market value while SmithKline's shares rose by more than 8 per cent, increasing its value by pounds 3.6bn. At these levels a combined Glaxo-SmithKline would be worth pounds 117bn.
Shares in Zeneca were dragged higher in the frenzy, rising by almost 10 per cent as analysts suggested it may now be prompted to seek a deal. "Zeneca will be touted as a bid candidate though the management are likely to be against it," said Valerie Lee at Panmure Gordon. "And we would expect to see consolidation in the US market."
Analysts suggest the most likely groups to seek a deal are Merck of the US and American Home Products, which was in talks with SmithKline itself until Friday night when it was abandoned by SmithKline in favour of a Glaxo deal.
But while analysts praised the proposed merger, some institutional shareholders were more critical. One senior fund manager said: "I can't help but think that the whole thing is somewhat overcooked. Is it really conceivable that Sir Richard Sykes [Glaxo's chairman] and Jan Leschly [SmithKline's chief executive] will work so well together? It looks like a blueprint for tension at some stage."
The fund manager also questioned the scope for potential cost-cutting, given that Glaxo has only recently completed major cuts following its merger with Wellcome in 1995. "Are these companies really so inefficient that they will be able to make pounds 1bn-plus savings?"
Another institutional investor questioned the potential windfalls for the group's management, depending on how the deal is structured. If a "newco" is formed to take over both companies it could trigger share option payments on both sides. These would run into millions of pounds.
If the merger goes ahead there are likely to be huge pay increases for the Glaxo executives, who earn significantly less than their counterparts at SmithKline, which has a reputation for lavish payments.
Sir Richard Sykes was paid a total of pounds 1.1m in 1996, compared with Jan Leschly's pounds 2.1m. As Sir Richard will be executive chairman of the new group and Mr Leschly its chief executive, the Glaxo man is likely to expect equal pay. He will need at least to double his salary to take him ahead of SmithKline's Dr Jean Pierre-Garnier, who will be one of the merged group's executive directors. He earned pounds 1.96m last year.
Outlook, page 25Reuse content