Pfizer, Warner-Lambert ink $90 bn merger

For American Home, the collapse of its deal with Warner-Lambert, Morris Plains, NJ, marks the third time in about two years it has failed to complete such a transaction. John Stafford, American Home’s chairman, is expected to seek another merger partner for the drug maker, which is considered attractive to any number of potential American and European suitors. American Home, Madison, NJ, also is expected to accelerate efforts to sell its flagging agricultural business, according to knowledgeable people.

Under an agreement tentativelyreached by all three companies during the past few days, Pfizer will pay 2.75 of its shares for every Warner-Lambert share. American Home will receive a $1.8 billion breakup fee that was part of its merger agreement with Warner-Lambert, the people said.

The merging companies said that they will achieve $1.6 billion in cost savings by 2002 and that earnings growth will average 25% a year over the next three years. The merger is likely to be completed in several months.

Monday’s likely announcement will end an extraordinary course of events that at one point had Warner-Lambert and American Home approaching other companies to find a white knight to rescue Warner-Lambert from Pfizer’s clutches. Last month, consumer-products giant Procter & Gamble Co. seriously considered buying both Warner-Lambert and American Home, though those talks fell apart when P&G’s share price dropped.

After Pfizer and Warner-Lambert reached a tentative agreement in the middle of last week about how much Pfizer would pay, theremaining obstacle was how to placate American Home. For Pfizer, it was critically important its deal receive favorable pooling-of-interests accounting treatment. This meant American Home had to waive rights to cross options it held as part of its merger agreement with Warner-Lambert.

Initially, American Home demanded about $200 million above the breakup fee – possibly in the form of rights to certain Pfizer or Warner-Lambert consumer products or drugs. A problem for Pfizer was that such in-kind compensation might jeopardize pooling-of-interests accounting, according to legal experts. Pfizer and Warner-Lambert ultimately told American Home the most they could do was pay the $1.8 billion fee.

American Home could have dragged its feet and gone to court with Pfizer – a hearing on the legality of the cross-options arrangement already was scheduled for next month. But in the end, American Home figured there was little upside to playing the spoiler, and it chose to take the not-inconsiderable breakup fee andexit. With $1.8 billion in hand, American Home should be well positioned to reassure skittish investors it can manage legal liabilities linked to its former diet drugs.

As expected, the combined company will retain Pfizer’s name and New York headquarters and will be run by Pfizer’s chairman, William Steere. Warner-Lambert’s chairman, Lodewijk J.R. de Vink, will stay on until the deal is closed but isn’t expected to remain at the company, according to people close to the matter. However, Pfizer is understood to want his continued advice in helping combine the two companies.

Pfizer’s president, Henry McKinnell, and Warner-Lambert’s pharmaceuticals chief, Anthony Wild, likely will head the transition team, which will integrate the companies. Pfizer has offered Mr. Wild a high-level executive position in the combined company, but it isn’t clear hether Mr. Wil will accept.

Several top Warner-Lambert officials do appear likely to stay, however. Morgan Morton, who heads Warner-Lambert’s large consumer-productsdivision, is expected to run both companies’ consumer-products business from Warner-Lambert’s headquarters. Warner-Lambert’s research head, Peter Corr, is likely to take a top-level science position in the combined company. Warner-Lambert’s research labs will remain in Ann Arbor, Mich.

Pfizer is also expected to offer some Warner-Lambert board members seats on the board of the combined company.

The merged company will be a behemoth–second in size only to the company to be formed by the merger of Glaxo Wellcome PLC and SmithKline Beecham PLC–with many big-selling drugs for heart disease, mental-health disorders, infections and diabetes, as well as an array of consumer products from razors to breath mints. It will have annual revenue of $28 billion, market capitalization exceeding $230 billion and will spend $4.7 billion a year on research.

Its crown jewel will be the cholesterol-lowering drug Lipitor, expected soon to become the biggest-selling drug in the world. Lipitor, developed by Warner-Lambertand co-marketed with Pfizer, was one of the driving forces behind the takeover battle. When Warner-Lambert decided to merge with American Home, Pfizer concluded it couldn’t afford to pass up such a good opportunity. It launched its hostile bid Nov. 4. just hours after American Home and Warner-Lambert announced their friendly merger agreement.

The transition period poses big challenges for Pfizer, given the acquisition’s size. Pfizer will have to move quickly to combine the two companies and put a damper on any tensions left from the big merger battle.