Outlook: Something is wrong at GSK if it needs another merger

Energis/KPNQuest; Now AIT stumbles Ê

Internal links

Market cool over GSK Bristol-Myers merger talks

KPNQwest files for bankruptcy as talks fail

Directors dip into own pockets to bail out AIT

It's going back many years now, but once upon a time, Glaxo, the precursor to today's pharmaceuticals giant GlaxoSmithKline, used to be described in the City as "the quoted university". Glaxo seemed to be good at discovering new medicines, but not much good at marketing them. Then came ventolin, at the time a miracle anti-asthma drug, and later zantac, a world-beating stomach ulcer treatment. They transformed the company. Using their sales power, Glaxo was able to roll out a vast worldwide marketing network through which to pour what senior executives confidently predicted would be a growing pipeline of blockbuster medicines.

Unfortunately it didn't work out that way. There was nothing remotely close to fill zantac's place as its patent expiry date approached, so instead Glaxo started buying companies. First there was Wellcome, then there was SmithKline Beecham. Zeneca would have fallen to Sir Richard Sykes's empire-building ambitions too if he'd been allowed his way, establishing complete hegemony in the British pharmaceuticals industry. But he would never have got away with it.

In any case, Wellcome worked like a dream in tiding Glaxo over its patent expiry problem, as well as providing extensive potential for earnings-boosting cost cuts. The SmithKline Beecham merger is proving altogether more problematic. On the evidence of the share price, which is at a four-and-a-half year low, it has failed to add any value whatsoever. As for solving the patent expiry problem, it has so far done no such thing. The recent collapse in the share price has been caused primarily by fears that Augmentin, the company's top-selling antibiotic, faces an early, Prozac-style wipeout from generic competition.

It wasn't meant to be this way. When the merger was first mooted, there was lots of starry-eyed talk about the benefits that would be derived from combining Smith Kline's strength in bio-informatics with Glaxo's prowess in traditional chemistry. The two were said to have complementary product pipelines and in any case, only those with the largest research and development budgets could hope to succeed in the explosion of scientific advance that would be derived from the successful mapping of the human genome. All this may yet be proved true, but so far there's very little evidence of it. Indeed, the suspicion is that product discovery and development may be getting stifled by the monstrous bureaucracy needed to manage an R&D capability on the GlaxoSmithKline scale.

When in trouble, buy another company. How serious the talks with Bristol-Myers Squibb might have been, or whether they ever took place at all, is open to question, but no one was denying them yesterday. If they are going on, then it is a deeply worrying development. That Glaxo's chief executive, Jean-Pierre Garnier, could be considering yet another big cost-cutting takeover when the ink is barely dry on the last one is indicative of a company with serious problems. It suggests that this has become an organisation in repeated need of fresh infusions of cost-cutting red corpuscles to keep earnings moving upwards. More seriously, it suggests a company which has lost its inventiveness and ability to drive new product development. Mr Garnier needs to prove that he can make the last big merger work before anyone will believe Glaxo is ready for another. Pharma consolidation has for the time being gone as far as it ought to.

Energis/KPNQuest

Shares in what was once Britain's most promising alternative telco, Energis, were yesterday changing hands in the stock market at just 1.4p each. This is remarkable, if only because a snowball in Hades would stand a better chance than shareholders in Energis of ever seeing any of their money back. The shares are worth nothing, not even the paltry 1.4p they were trading at yesterday.

News that the two private equity groupings interested in picking up the pieces, Apax in partnership with Carlisle Group and Permira, are thinking of pooling their resources further undermines any bargaining position the besieged Energis board had left, removing as it does any last remaining hope of an auction. In actual fact the two cannot come together without first seeking Energis's permission, since they both signed confidentiality clauses. So far permission has not be sought. But there is little doubt it will be, and Energis would be hard pressed to refuse.

Both venture capital groups are keen to stress that there can be no question of an offer to shareholders. Even bondholders will be lucky to get more than the 10p in the pound the bonds currently trade at.

Whatever the outcome of these negotiations, the private equity groups are going to have to inject substantial new equity into the group to make it a going concern once more. They may even need to make the company debt free, by paying off all the group's £700m of outstanding bank borrowings, to give it a fighting chance. Presumably such companies are still worth something, but with KPNQuest finally admitting defeat last night and filing for bankruptcy, is Energis really worth the £750m (£700m for bank borrowings and £50m to buyout the bonds), the venture capital funds may have to pay for it? That the Energis story ends in receivership still looks all too possible.

Now AIT stumbles

And here comes another tech-company implosion. Pop, there goes AIT Group, a financial software company whose shares sank 80 per cent yesterday after a savage profits warning. How do these companies manage to do it?To cut a long story short, AIT issued a trading statement on 2 May saying sales and profits for the year to 31 March were in line with expectations. As it turns out, they weren't.

AIT issued the first statement on the back of revenue it "reasonably expected to be committed at that time". Hey presto, one particular deal fell through, leaving a £1.1m profit shortfall. Worse still, debts are £10.5m, the company can't meet its short-term cash requirements and the main board of directors have had to pass the hat round to raise £700,000 to see the company through.

All this is horribly embarrassing for the few City analysts who follow the stock, for they have been glowingly positive on AIT's prospects. Poor Dresdner Kleinwort Benson started coverage of the stock only three days ago with a "buy" recommendation and a price target of 695p (the shares now stand at 96.5p). UBS Warburg, AIT's house broker had gone even further earlier in the month with a 950p price target.

Heads are bound to roll. Major investors such as Standard Life, Morley Fund Managers and Barclays Global are unlikely to let the senior management, led by Tom Rigby, the chief executive, and Gareth Bailey, get away with this. AIT describes itself snappily as "a major global provider of customer relationship management solutions which empower organisations to create lifelong, profitable customer relationships and evolve processes as the needs of their businesses and customers change". Blimey. It just goes to show; never invest in something you cannot fully understand.

jeremy.warner@independent.co.uk