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AHP mixes in Monsanto
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June 1, 1998: 4:28 p.m. ET
Drug titan, jilted in January deal, inks $33B merger with big chemical maker
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NEW YORK (CNNfn) - Mixing a chemicals company in with its base as a drug maker, American Home Products Corp. said Monday it will buy Monsanto Co. in a stock deal worth $33.3 billion, or about $55.56 a share.
The deal, touted as a merger of equals, will spawn a life sciences and drug powerhouse that makes an array of consumer goods, including NutraSweet, Chap Stick lip balm, Advil pain reliever and Ortho Lawn Products.
And it vaults the new company -- yet to be named -- near the top rung among drug firms in terms of sales, rivaling leader Merck & Co. A combined American Home-Monsanto, the companies said, will have a market value of $96 billion and 1998 sales of $23 billion.
Merger marks change of climate
The deal comes amid a climate of change in the industry. Monsanto, mainly a life sciences concern focusing on agricultural products, has squared off with DuPont Co. as the top two crop-engineering companies.
American Home had been involved in an effort to merge with UK-based SmithKline Beecham PLC, but that deal failed in January.
While American Home and Monsanto are moving together, DuPont and Merck recently split apart. Merck sold its 50-percent stake in a pharmaceutical venture with DuPont in May, citing the high research and development cost of getting drugs to market.
At a news conference Monday, John R. Stafford, American Home's chief executive officer, president and chairman, said his new company will spend about $3 billion a year on R&D.
Deal will bring job cuts
And, Stafford said, "there will be some employee reductions [and] the elimination of duplicative jobs." Monsanto has about 23,000 employees and American Home has about 52,000, he said.
The deal is a slight premium for Monsanto shareholders, who will get 1.15 shares in the new company for every Monsanto share they now own. American Home stockholders will retain their shares.
In New York Stock Exchange trading Monday, Monsanto stock (MTC) was down 1-13/16 at 53-9/16. (Click here for a 52-week stock chart)
Shares of American Home (AHP) were up 7/16 at 48-3/4. (Click here for a 52-week stock chart)
Monsanto shareholders, who still must approve the deal, will own about 35 percent of the new company. But one analyst, who did not want to be identified, said the shareholders "were probably looking for more" in a buyout offer.
For its part, American Home said it expects earnings per share will be diluted by up to 15 percent in the first year. The deal is expected to contribute to earnings after the year 2000.
Robert Shapiro, chairman and chief executive officer of Monsanto, said the merger will bring both companies more success than either could have had individually.
"This combination could create a company that could operate even more successfully in this exciting era than either of us could separately, taking full advantage of the opportunities ahead of us...," Shapiro said.
The companies expect to realize annual savings of $1.25 billion to $1.5 billion within three years.
"If you look at the earnings prospects for the combined company, those prospects continue to grow, even in the short term," Shapiro said.
Cynthia Beach, pharmaceutical analyst at Gerard Klauer Mattison, said AHP will benefit most from the marriage.
"Monsanto had a great product pipeline, but they didn't have a global infrastructure. They are going right into American Home Products' business and will have it built in for them," she said.
Goldman Sachs advised Monsanto in the merger talks, while Bear Stearns was adviser to American Home. American Home will pay Monsanto a $700 million break-up fee if the deal falls through, Shapiro said.
The deal is expected to be tax-free to shareholders and will be accounted for as a pooling of interests. Stafford and Shapiro will share the top two spots at the new company.
Corporate headquarters will be in American Home's hometown of Madison, N.J., while the new company's agricultural business will have headquarters in St. Louis, Mo., where Monsanto is based. 
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