Describing it as a merger of equals, the two companies unveiled a stock transaction worth $26.6bn (pounds 16.6bn). The deal will create the world's 11th-largest drugs company with annual sales of about $17bn, including $10 bn in prescription sales. It has not been given a name yet.
"I think it is a decent deal, but I don't think it is what many investors involved with Monsanto were hoping for," said James Hickman of Credit Suisse First Boston. "They didn't get a big premium." Among the brokerages downgrading Monsanto were PaineWebber and Donaldson Lufkin & Jenrette.
Monsanto, based in St Louis, had long been casting around for a partner and had held talks most notably with American Home Products and DuPont. The company - and its share price in particular - was suffering from the backlash against its genetically engineered food products.
In a move that opponents of so-called "frankenfoods" may take as vindication, the two companies said 20 per cent of Monsanto's agrichemicals division will be spun off to the public once the merger is completed. Analysts warned that such an initial public offering may be difficult sell to investors, however.
The chief executive of the new company will be the current chief executive of Pharmacia, Fred Hassan. Robert Shapiro, who heads Monsanto, will be the new company's non-executive chairman for 18 months, after which he will be succeeded by Mr Hassan.
Wall Street will be watching for possible counter-bids. This seems plausible as there is no premium in this deal for shareholders in either Pharmacia or Monsanto. "If you follow the dollar signs, you would expect another bidder to come in," said Michael Krensavage of Brown Brothers Harriman. Pfizer has previously indicated an interest in Monsanto's drugs division.
While troubles with genetic engineering have cast a shadow over Monsanto, the company has remained highly profitable, thanks mostly to surging earnings at Searle, its drugs division. Searle has been powered by its successful new arthritis pain-controlling drug, Celebrex.