A bid to finish independence

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The Independent Online
IF IT were confined to radio, Glaxo's fight for Wellcome would appear to be a battle between Ray Illingworth, the Yorkshire-born chairman of England's cricket selectors, and Sean Connery, with his soft Scots burr, writes William Kay.

Sir Richard Sykes, the chairman and chief executive of Glaxo, and John Robb, his Wellcome counterpart, sound uncannily like Illingworth and Connery. However, whether they choose cricket bats or dry martinis as their weapons, the odds are heavily stacked in favour of Sir Richard. He has industrial logic on his side and, if it comes to an auction, plenty of financial firepower in reserve.

Mr Robb has already had to concede over one ace in Sir Richard's hand: that the proposed £9.2bn takeover makes industrial sense.

"We have been cutting costs for a long time now," said Mr Robb, "but there are still more savings to be had from putting the two companies together."

Although he went on to assert that morale at Wellcome would be devastated if the deal went through and that it would reduce the diversity of the company's research, Mr Robb has encountered a problem that will be faced by an untold number of his counterparts in the next year or two. Industrial logic is the name of the game and - as long as predator and victim are in the same industry and the savings are sufficiently clear - defending chairmen will be on the back foot from the outset. Like Mr Robb, they will be forced to fight on the narrower ground of price.

Wellcome is naturally doing all it can on that front, pushing out good news about drug sales and patents, and bringing forward to this week its next set of results, which - within the accountancy rules - will be as glowing as the company's finance department can make them.

But Mr Robb and his co-directors have had to swallow the bitter pill that their company's days as an independent entity are almost certainly over. Aside from price, the only other influence they can exert is to make themselves attractive to a counter-bidder.

Because that alternative buyer will be offering a higher price and will rescue Wellcome from the loathsome embrace of Glaxo, it will be known as a white knight. But any romantic notions of rescue can be dismissed: as soon as it gets control, a bidder will begin cashing in on the precisely the same savings as Glaxo has in mind.

So great are these that Sir Richard lapses into uncharacteristic coyness when asked to spell out how much he plans to save at Wellcome. "I am not allowed to comment on any suggested figures," he claimed, "other than to confirm that, at this price, it would enhance the earnings per share of the combined group."

Analysts reckon that Glaxo will save around £500m a year, mainly through sacking most of Wellcome's 17,000 workforce.

And, Sir Richard warned: "If we have to pay more to top a counter-bid, then we will have to make even more savings before the deal can become earnings enhancing.

"By arguing about the price, Wellcome may be doing its own employees down."

So, even among these two first-timers at the game of big-time corporate cannibalism, the fighting is getting dirty.

But beneath that menacing tone, Sir Richard knows that he needs to acquire Wellcome if he is to prevent Glaxo itself from becoming fodder for another predator.

He said: "Organic growth is no longer an option on its own. Pharmaceuticals is no longer a protected market. We are selling to governments, insurance companies, and pharmacy benefit managers. It's a competitive market, and we have to have the lowest costs just to compete.

We are not trying to down- size - we are trying to make ourselves better."

Nevertheless, if Glaxo wins Wellcome, it will be as much because of Mr Robb's alleged shortcomings as on account of any abstruse financial calculations about the state of the pharmaceuticals market.

The decision of the Wellcome Trust, owning nearly 40 per cent of the drugs company, to back Glaxo is a massive rejection of the Robb style. Well may he feel hurt that, when he met the Trust's Sir Roger Gibbs less than a fortnight ago, Sir Roger gave him no indication of what was afoot.

This subplot looks likely to be decided in court, as the representatives of the late Sir Henry Wellcome's commercial company wrestle with his trustees to determine what he would have wanted.

More than that, however, the City's institutional investors have not forgiven Mr Robb for remaining both chairman and chief executive after the death of his predecessor, Sir Alistair Frame.

That is frowned on by the Cadbury principles of corporate governance. Brian Moffat at British Steel has so far been allowed to get away with doing exactly the same, as the late Sir Alistair was chairman there, too.

The difference is that British Steel is seen as a success. Whether rightly or wrongly, Wellcome is not.

Target: stalking the cash-rich

Share Market Net cash as price (p) value(£m) % of value Amstrad 132 153.5 107 Sedgwick Group 148 808.0 84 Paterson Zochonis 421 191.0 57 CE Heath 238 156.8 53 Willis Corroon 139 582.4 51 Vosper Thorneycroft 737 235.0 50

Source: Henry Cooke, Lumsden 737 235.0 50

Target: sales high, shares low Share Market Sales as price (p) value (£m) % of value 737 235.0 50

J Bibby 80 125.0 547

APV 57 170.0 508

ERF 350 34.3 433

P&P 79 61.8 386

Jeyes Group 164 33.6 342

SR Gent 90 32.6 362

Bridon 158 90.4 337

Source: Henry Cooke, Lumsden