Monsanto in $50 billion merger

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The Independent Online

Monsanto Co. and Pharmacia and Upjohn signed a merger agreement Sunday, creating the world's 11th largest drug company with a cabinet of top-selling medicines to treat ailments from arthritis to glaucoma.

Monsanto Co. and Pharmacia and Upjohn signed a merger agreement Sunday, creating the world's 11th largest drug company with a cabinet of top-selling medicines to treat ailments from arthritis to glaucoma.

The combined company, as yet unnamed, will have sales this year of dlrs 17 billion and 60,000 employees. The new company's pharmaceutical business will be headquartered in Peapack, New Jersey, where Pharmacia is based, and the agricultural-chemical business will be headquartered in Monsanto's hometown of St. Louis.

This is the second drug merger in as many months. In November, American Home Products Corp. announced an agreement to acquire Warner-Lambert Co. That deal, however, is being challenged in court by a rival suitor, Pfizer Inc.

The frenetic search for partners in the pharmaceutical industry is being driven by the need to finance research for blockbuster drugs, while facing pressure from political and consumer groups to keep prescription costs down.

"Diversifying one's risk is very important in pharmaceuticals," said Fred Hassan, chief executive officer of Pharmacia and Upjohn. "This will give us the diversity we need."

The combined company will have a research budget of dlrs 2 billion, and a broader sales force to push each other's drugs. Monsanto's Searle division, which sells the popular arthritis treatment Celebrex, can be used to bolster next year's launch of Pharmacia's new antibiotic called Zyvox.

The announcement Sunday ends Monsanto's long search for a buyer. Robert Shapiro, the chairman and chief executive officer of Monsanto, has had at least three failed attempts to clinch a deal since October 1998, when Monsanto's merger with American Home Products fell apart.

Shapiro will be the non-executive chairman of the newly combined company for 18 months and then retire. Hassan will be the president and chief executive and assume the chairman's title when Shapiro steps down.

Monsanto has had trouble finding a partner because its agricultural-chemical business, which makes genetically altered seeds and weed killers like Round Up, is facing consumer backlash, particularly in Europe. Concerns about potential health risks from genetically altered foods have caused many manufacturers to rethink ingredients.

Shapiro invested heavily over the past five years to build up Monsanto's agricultural business - money that now seems poorly spent in light of the public outcry.

Public concern is "clearly an issue, and we obviously are going to be working on that to resolve it," Hassan said. "We are confident it can be resolved because the underlying science is very good."

However, he plans to sell 19 percent of the agriculture business in an initial public stock offering next year. The agricultural business will have a separate management team and board of directors.

Combining the operations of Monsanto and Pharmacia will save the new company dlrs 600 million within three years. Hassan said there would be some layoffs, though he could not say how many.

Shareholders of Pharmacia will receive 1.19 shares of Monsanto stock, worth about dlrs 50 based on Friday's closing price, for each share of Pharmacia they hold. At that price Pharmacia shareholders won't be getting a premium for their shares.

Monsanto shareholders may also be disappointed with the terms of the deal. Monsanto shares rose Friday on rumors of the deal, as some investors anticipated their company would be acquired and they would get a premium for their shares. Monsanto shares are down 18 percent for the year.

"It sounds like a decent combination, but there seem to be better potential partners for Monsanto," said Jay Hickman, an analyst at Credit Suisse First Boston who follows Monsanto.

Any rival bidder would have to hurdle the breakup provisions in the Monsanto-Pharmacia agreement, which include provisions that prevent a rival from receiving favorable accounting treatment and a dlrs 575 million penalty fee if the deal falls apart.

Pharmacia and Monsanto will each have 10 seats on the new board of directors. Monsanto shareholders will own 51 percent of the combined company, which will have a market value of dlrs 50 billion.

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