December 20, 1999
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Pharmacia & Upjohn, Monsanto Boards
Approve $27 Billion Merger of Equals
By NIKHIL DEOGUN, ROBERT LANGRETH and THOMAS M. BURTON
Staff Reporters of THE WALL STREET JOURNAL
The boards of Pharmacia & Upjohn Inc. and Monsanto Co. approved
a $27 billion merger of equals designed to transform two midtier
pharmaceutical businesses into a more formidable contender in
the rapidly consolidating drug industry.
In a significant move, the combined entity is planning, as soon
as practical, an initial public offering of as much as 20% of
Monsanto's large agricultural business, which has been rapidly
built up through a slew of acquisitions but is under a cloud
because of the uproar over genetically modified products. The
agrochemical business, which has $4.3 billion in annual revenue,
will have its own board and will be run out of Monsanto's
headquarters in St. Louis.
Monsanto Merger Is Just Latest of Bold Moves by Pharmacia CEO
The move underscores the skepticism with which Wall Street has
viewed Monsanto's heavy emphasis on agricultural biotechnology,
such as genetically altered seeds.
An all-stock merger of Pharmacia and Monsanto, which owns the
valuable G.D. Searle pharmaceutical business, comes at a time of
renewed emphasis on mergers in the drug industry, as exemplified
by the takeover battle for Warner-Lambert Co. A combination of
these two smaller players could create a rival in size
comparable to companies such as American Home Products Corp.
The combined firm is expected to have estimated 1999 sales of
$17 billion and an annual research and development budget of
more than $2 billion. The companies expect $600 million in
annual cost savings by the third year.
Under terms of the agreement, Pharmacia shareholders will
receive 1.19 shares of the combined entity for each share of
Pharmacia they now own; each Monsanto share will represent one
share in the combined company. Since the deal is a merger of
equals, neither company's shareholders will receive a takeover
premium.
Fred Hassan, Pharmacia's well-regarded chairman and chief
executive, will be president and CEO of the combined entity,
which will be run from Pharmacia's headquarters in Peapack, N.J.
Robert B. Shapiro, Monsanto's 61-year-old chairman and CEO, will
be nonexecutive chairman of the combined entity for a period of
18 months, when he will be succeeded by Mr. Hassan, 54. The
board of the merged firm will be evenly split between the two
companies, and Monsanto will own slightly more than 50% of the
new entity, which has yet to be named.
The tax-free transaction will be accounted for as a pooling of
interests for accounting purposes. So long as the proceeds of
the IPO of the agricultural business stay within the subsidiary,
and as long as Monsanto owns more than 50% of the new company,
the transaction shouldn't violate favorable accounting or tax
policies.
News of the merger talks between Monsanto and Pharmacia was
reported in The Wall Street Journal on Friday, and investors
seemed skeptical as to why Pharmacia shareholders would want to
own part of an agricultural business. Taking that business
public may allay some concern on Wall Street. At 4 p.m. Friday
on the New York Stock Exchange, Pharmacia stock was down $2.625
to close at $50.375, while Monsanto had advanced $1.375 to
$41.75.
The merger is in part an attempt on the part of Monsanto's
Searle drug division to achieve critical mass that will assist
its research and development. Searle is prolific and has a rich
pipeline, largely spurred by research conducted into the
physiology of inflammation by Philip Needleman, Monsanto's chief
scientist, who will hold the same post in the combined firm. The
research by Dr. Needleman and his colleagues led to the
blockbuster arthritis painkiller Celebrex. Celebrex's class of
drugs, called COX-2 inhibitors, are also showing promise in
treating various cancers.
But Searle is already stretched to the limit financially on what
it can accomplish in late-stage clinical trials. The drug
division's profits, too, have been propping up Monsanto's
agriculture biotechnology efforts. In the combination with
Pharmacia, a new company would emerge that has drugs in numerous
major therapeutic areas, such as arthritis, cardiovascular
drugs, antibiotics and antiviral drugs, in the works.
Write to Nikhil Deogun at nik.deogun@wsj.com, Robert Langreth at
robert.langreth@wsj.com and Thomas M. Burton at
tom.burton@wsj.com
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