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Warner rejects Pfizer's offer
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November 4, 1999: 11:49 p.m. ET
Drug co.'s board rebuffs surprise $82.4B offer, still favors $72B merger with AHP
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NEW YORK (CNNfn) - Warner-Lambert Co.'s board of directors late Thursday night rejected a surprise $82.4 billion merger offer from Pfizer Inc., saying it still favored a friendly $72 billion deal inked with fellow drug maker American Home Products earlier in the day.
The board's rejection, made in a prepared statement, was the latest salvo in a suddenly contentious bidding war between Pfizer and American Home Products, who each made offers for Warner-Lambert within hours of each other Thursday.
Pfizer stunned Wall Street Thursday afternoon with its unsolicited offer, made just after the drug maker announced the $72 billion deal with American Home Products Co.
In its statement, Warner-Lambert's board said it was "not in a position at this time to take any action" on the Pfizer proposal, based upon the provisions of its contract with American Home Products.
Even so, the board said it "strongly believes" its existing merger agreement with AHP "remains in the best long-term interest of our shareholders."
"Our decision to proceed with American Home Products was reached only after careful review for more than a year of the strategic alternatives that would best serve these interests and several months of discussions with American Home Products," the board said.
A Warner-Lambert spokeswoman was not immediately available for comment.
Warner vows to fight litigation
Pfizer's offer, revealed as officials from Warner-Lambert and American Home Products were detailing their plans to create world's largest pharmaceutical concern, was expected to spark a bidding war between two of the industry's biggest players.
There are other matters to contend with as well.
Pfizer, moving quickly to gain the upper hand, followed its surprise offer with legal action, announcing it filed suit in Delaware to stop what it called the "egregious and unlawful" $2.0 billion break-up fee contained in the AHP-Warner-Lambert deal. Pfizer claims directors at Warner-Lambert violated their fiduciary duties in approving that fee.
In a strongly-worded letter to de Vink, Pfizer Chief Executive William Steere said Pfizer was prepared to move forward with its offer.
"I want to reiterate that I have repeatedly tried over the past few weeks to discuss with you the merits of a combination between Pfizer and Warner-Lambert," Steere said. "Unfortunately, our efforts have been rejected -- a response that is particularly disappointing given the substantial success represented by our partnership in developing and marketing Lipitor, which both our companies have publicly acknowledged."
But Warner-Lambert's board said it was "quite disappointed" by what it call such "mischaracterizations" and vowed to fight the litigation in court.
The board "believes that it acted solely in the interests of its shareholders and other constituencies and will continue to do so," the board said. "We are fully prepared to -- and will -- defend our actions in the litigation . . . which we believe is totally without merit."
Prior to Warner-Lamber's rejection, analysts and fund managers said unless American Home steps forward with a higher bid, Pfizer's hefty premium is likely to win over Warner-Lambert shareholders.
"I don't see how Warner-Lambert turns down Pfizer unless the American Home deal gets sweetened," said Walter Row, a pharmaceuticals analyst at the mutual fund Eaton Vance.
A bigger premium on the horizon?
Pfizer's (PFE) offer values Warner-Lambert at $96.40 a share, a 15 percent premium to the American Home Products bid, which values Warner-Lambert at $83.55.
The timing of the Pfizer bid appeared to catch AHP and Warner-Lambert by surprise, forcing the companies' two leaders to cut short a round of media briefings and huddle with their lawyers.
During an interview with CNNfn, just as news of the Pfizer bid was breaking, AHP's Chief Executive John Stafford and Warner-Lambert Chief Executive Lodewijk J.R. de Vink declined to comment specifically on Pfizer's bombshell.
"Obviously if anything like that is taking place we'll take a close look at it, Ludwig and I and confer and we will do what we think is in the best interest of the shareholders," Stafford said. "Both companies and the two companies together. We are both very committed to completing this transaction and we will just have to see what our reaction will have to be."
Pfizer's bid is one of the largest takeover attempts of all time and the largest unsolicited takeover bid. If Pfizer wins, AHP would be left standing at the altar for the third time. Two previous merger deals engineered by Stafford, involving Monsanto and SmithKline Beecham, fell apart before they could be completed.
Steven Cohen, director of research for arbitrage firm Kellner, DiLeo told CNNfn that Pfizer has the upper hand right now by virtue of its higher bid. However, he said there will likely be a number of intermediate steps before a winner emerges.
"This is a company that is largely owned by institutions and at the end of the day I think economics will prevail," he said.
Tale of the tape: AHP vs. Pfizer
Under terms of the Warner-AHP deal, touted as a merger of equals, Warner-Lambert shareholders would receive 1.4919 shares in the new company for each share that they now own; American Home shareholders would receive one new share.
By comparison, the Pfizer (PFE) proposal would provide Warner-Lambert shareholders with 2.5 shares of Pfizer stock for each share of Warner-Lambert (WLA) stock.
Either deal would be the largest in the history of the pharmaceuticals business and would create the world leader in sales, topping Merck (MRK). The Pfizer deal would create a combined company with about $28 billion in sales, while an American Home-Warner-Lambert combination would have about $26 billion in sales.
Pfizer said it told Warner-Lambert several weeks ago that it wanted to make a deal. But Pfizer also said its offer is conditional on Warner-Lambert's elimination of the break-up fee. Warner-Lambert could not be reached for comment following the announcement of the lawsuit.
Shares of Warner-Lambert jumped 6-3/16 in Thursday trade to close at 90, American Home (AHP) shares fell 1 to 55, and Pfizer (PFE) drifted down 1-3/8 to 37-3/16.
A pair of blockbuster drugs
A deal between Warner-Lambert and Pfizer would pair two growing companies riding high on blockbuster drugs. Pfizer, the sixth-largest drug company in the world, makes the impotence drug Viagra while No. 11 Warner-Lambert makes cholesterol drug Lipitor.
A combined American Home and Warner-Lambert would sell over-the-counter painkillers Advil and Anacin, plus Dentyne gum, Certs mints and Listerine mouthwash.
Independent drug analyst Hemant Shah said the American Home deal also is attractive because American Home has a strong pipeline that will help compensate for Warner-Lambert's almost exclusive reliance on Lipitor for blockbuster drug sales.
According to its statement, Pfizer said it had a prior agreement with Warner-Lambert that prevented it from making an offer earlier. The accord with American Home deactivated that so-called "standstill provision." Warner-Lambert and Pfizer already market Lipitor together.
The key question for American Home is whether the hobbled company, which already has put aside $3.75 billion to pay for lawsuits regarding the "fen-phen" diet drug treatment, can put top Pfizer. Its stock has been sliding recently.
That's what faces John Stafford, American Home's chairman and CEO, who has been under growing pressure to strike a deal after merger pacts with both Monsanto (MTC) and SmithKline Beecham (SBH) fell apart over management issues.
Should American Home lose the bidding battle, Eaton Vance's Row said, it would likely try to buy another rival.
"They'll just go down the list to the next player, like a Schering-Plough, an Eli Lilly, or take your pick," he said. American Home "wants to do a deal -- and they will."
A battle for control?
There were other signs that Pfizer is expecting to encounter resistance from Warner-Lambert, although Pfizer did not announce an official tender offer that would take its bid directly to shareholders.
The Pfizer offer says nothing about an important issue American Home and Warner-Lambert appeared to have resolved: what role will Warner-Lambert executives have if the Pfizer takeover comes about.
In its letter Thursday to Warner-Lambert CEO Lodewijk J.R. de Vink outlining the offer, Pfizer did not say what role in a new company de Vink would have. One analyst said that could become an important sticking point.
"If it comes down to a bidding war, if it's going to be purely price, I think Pfizer will come out ahead," said Bob Kirby, an Edward Jones drug analyst. "But if it is a cultural issue, the fact that American Home warmed up first to Warner-Lambert could make a difference."
As part of the American Home deal, de Vink, who has been CEO of Warner-Lambert for less than a year, is set to become CEO of the new AmericanWarner and would become chairman within 18 months in place of Stafford.
During the CNNfn interview, Stafford sought to play up the cultural compatibility between AHP and Warner-Lambert.
"We think we have worked out a organizational structure which would be very effective with clear lines of authority," he said. "We think there is a great opportunity as the number one prescription drug company and the number one consumer healthcare company in the world to move forward."
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