Mergers rooted in demands of the market

A familiar set of arguments lies behind the latest mega-merger to hit the pharmaceuticals industry - the agreed marriage of Upjohn of the US and Sweden's Pharmacia to create one of the world's top 10 ethical drugs companies. In modified form the same sort of logic is used to justify bid and merger fever in the other sectors bitten by the bug - media, financial services and defence. Is this latest obsession with the "big is beautiful" philosophy of corporate life any more justified than it has been in the past? Or is it just another outbreak of costly and ultimately worthless empire-building?

Using the Upjohn-Pharmacia tie-up as an example, let's examine the argument. Primarily the merger is about cost-cutting - some $500m of it annually. It is also about globalisation and concentration in what remains a highly fragmented industry. Even the mighty Glaxo Wellcome, now the world's largest, has no more than 6 per cent of the global market. Most analysts believe concentration has a long way to go yet. Two factors drive the process: customer pressure on prices and the steadily rising cost of R&D.

With pressure on drug prices increasing across the board, it is generally assumed that only very large companies can sustain the level of spending on research and development necessary to compete across the therapeutic spectrum. The increased cost of pharmaceutical R&D, moreover, is only partially a function of tougher standards and the law of diminishing returns. It is also caused by the fact that the lucky break - discovering a blockbuster product by stumbling across it - is an increasingly rare form of drug development. Targeting an ailment and hunting the right compound for treatment, the method used most commonly these days, is a more costly and exacting process.

What looks like a heady rush of "me too" thinking among the big pharmaceutical companies, therefore, has a relatively respectable backdrop of arguments to support it. The same is true of the other sectors riding the merger wave. All seem to be driven by the familiar themes of globalisation, deregulation, rapidly changing technology and the "more for less" demands of the customer.

Whether any of these mergers individually live up to the claims being made for them is, of course, a different matter. Not everyone in pharmaceuticals is as firm and committed a believer in the need for consolidation as Sir Richard Sykes, chief executive of Glaxo. The board of Wellcome thought it a lot of tosh.

Some managements will not be up to the task and quite a few of the claimed benefits will almost certainly prove illusory. None the less, the present merger boom is on the whole more strategically based and visionary than that of the Eighties, where the predominant theme was financial engineering. It is also firmly rooted in the demands of the marketplace. For these reasons the current wave looks like more than simple management aggrandisement. Unlike most previous merger booms, there might actually be something in it for shareholders too.

Start your day with The Independent, sign up for daily news emails
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
Arts and Entertainment
The sight of a bucking bronco in the shape of a pink penis was too much for Hollywood actor and gay rights supporter Martin Sheen, prompting him to boycott a scene in the TV series Grace and Frankie
footballShirt then goes on sale on Gumtree
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’
voicesGrace Dent on Grange Hill and Terry Sue-Patt
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010
Arts and Entertainment
Twin Peaks stars Joan Chen, Michael Ontkean, Kyle Maclachlan and Piper Laurie
tvName confirmed for third series
Cameron Jerome
footballCanaries beat Boro to gain promotion to the Premier League
Arts and Entertainment
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine