Outlook: Impasse threatened in SmithKline merger talks

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The Independent Online
Prospective mergers can have all the industrial and cost-cutting logic in the world going for them, but still they are prone to founder on some other matter or point of principle. During the great merger mania of the 1960s, one such famously fell apart on the issue of whether the chairman's office would have access to a private loo. No it would not, came the answer, and that was that.

There doesn't appear to be much danger of this specific difficulty interrupting the SmithKline Beecham/American Home Products merger talks but judging by growing signs of concern in the City, they could yet come to grief on another issue which has nothing to do with the commercial logic or otherwise of the deal.

SmithKline Beecham is these days operationally a US company; its head office is based in Philadelphia, its chief executive, Jan Leschly lives there, and most of its assets and profits are in the US. In terms of its ownership and domicile, however, SmithKline is a UK company. More than two-thirds of its shares are owned by UK investors and the company is also a constituent of the FTSE 100 index. If it merges with American Home Products, it will operationally become even more of an American company. Assuming the terms are of the share swop into a common holding company variety, the most likely course, it will also become largely a US owned company. In these circumstances it is inconceivable that the merged entity would be anything other than US domiciled and that its primary listing would be in the US too.

That in turn creates all kinds of difficulties for the company's UK shareholders. If the primary listing and domicile are in the US, then the company cannot be part of the FTSE 100 index. All indexed funds would have to sell, as would those with tight rules governing the geographical basis of asset allocation. As a result, a large swathe of UK shareholders would be deprived of the cost cutting and other industrial benefits of the merger. In other words this is a transaction which may not be in the interests of a large minority of shareholders, even though its commercial credentials might be impeccable.

There are two possible ways over this not inconsiderable hurdle. The first might be to create a dual listing structure on the model of the great Anglo-Dutch combines of Unilever, Shell and Reed Elsevier. However, there are good reasons why this has never been tried before with an Anglo American company, not least cultural. Furthermore American investors, not to mention Morgan Stanley, the moving investment banking force behind this merger, would be unlikely to tolerate a structure that would involve a division of assets and domicile in a company which operationally would be almost wholly American. A half-way house was tried with the original merger between Smith Kline and Beecham and it didn't work.

The other alternative would be for Smith Kline to mount an all cash bid for AHP funded in part by equity raised in the UK. Sadly, that too looks like being one for the dreamers. These days it is the Americans who rule the world, not the British. No doubt there is a price at which the American ego could be bought, but it is unlikely to be one that would appeal to UK investors. We may have something of an impasse in the making here.