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Monsanto, P&U in talks?
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December 17, 1999: 1:45 p.m. ET
Drug makers said to discuss $26B merger amid industry speculation
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - The pharmaceutical sector was awash in a new wave of merger speculation Friday after a report that drug maker Pharmacia & Upjohn and life sciences firm Monsanto Co. are negotiating a potential $26 billion merger.
Neither company would comment on a report in the Wall Street Journal that the two firms' boards of directors will discuss a deal over the weekend. The newspaper, citing sources familiar with the situation, said the companies are having "serious discussions” about a merger of equals but it is far from certain that a deal will go through.
Industry observers cautioned that the reported discussions - if true -- may not amount to anything, given the rampant rumors flying around the industry. The pharmaceutical sector has seen a spate of deals in recent weeks and speculation over other possible combinations.
"The problem is the list of usual suspects is so long at this point that virtually no transaction can be ruled out,” said Alex Zisson, an analyst at Chase H&Q.
Only last week, the Financial Times reported that Bridgewater, N.J.-based Pharmacia was approached secretly by American Home Products Corp. (AHP) about a potential deal in case American Home’s merger with Warner-Lambert Co. (WLA) falls through because of a higher, rival bid for Warner by Pfizer Inc. (PFE) that many observers say ultimately will likely prevail. American Home denied that report; Pharmacia wouldn’t comment.
Monsanto (MTC) stock rose on the speculation Friday, gaining 1 to 41-3/8 at mid-afternoon, down from earlier session highs. But Pharmacia (PNU) shares slipped 1-3/4 to 51-1/2. Pharmacia stock was cut to a "market perform,” down from a "buy,” by brokerage house Donaldson Lufkin & Jenrette.
Pharmaceutical analyst Michael Krensavage of Brown Brothers Harriman said Wall Street is wary of Pharmacia taking on Monsanto’s agricultural chemicals business, a unit beset with competitive pressures and a lawsuit from farmers and environments over the health effects of genetically modified crops. Analysts say that if the companies do merge, they likely would look to sell Monsanto’s ailing pesticides and agricultural products division.
It’s no secret that Monsanto has been assessing what it can do to boost its languishing share price. Investors have urged the St. Louis-based company to separate its high-flying Searle prescription drug unit from the agricultural products division, a move that analysts say the company has been actively considering.
Searle’s leading drug is the blockbuster arthritis painkiller Celebrex, which is co-marketed with Pfizer and has generated an estimated $1 billion in revenue since it went on the market in January. Monsanto has been on the merger hunt for at least a year. The company last year discussed a merger with American Home, which also operates an agricultural chemicals division, but then broke off the talks. Most recently, negotiations with Switzerland’s Novartis foundered in November.
Given that history, Monsanto likely is treading carefully and won’t jump into a marriage just to do a deal, said Sano Shimoda, president of BioScience Securities Inc.
"Monsanto has gone on this journey for over a year,” he said. "I think it’s very important to recognize that at the end of the day they might decide to do nothing.”
Pharmacia, the 16th largest U.S. drug maker, and Monsanto, the 18th biggest, have similar market capitalizations, meaning a deal could be structured as a merger of equals. Pharmacia’s market capitalization is about $26.3 billion, while Monsanto is valued at about $28 billion.
Performance of Monsanto shares this year.
If the two companies merge, they likely would look to sell the $4.3 billion-a-year agriculture business, which despite intermediate-term problems is "an extraordinary business” with strong cash flow, Shimoda said. He rates Monsanto a "hold,” largely because he thinks Celebrex, the company’s leading drug, is overvalued.
The agriculture chemical business is rapidly consolidating. Novartis and Anglo-Swedish company AstraZeneca (AZN) earlier this month agreed to merge their agricultural chemical units and spin them off, creating the largest company in the sector. That move may be putting pressure on Monsanto to shed its own sagging agribusiness, analysts say.
Pharmacia & Upjohn was formed through the 1995 merger of Sweden’s Pharmacia AB and Upjohn Co. of the U.S., and established headquarters in the United States. The company’s best-selling drug is the growth hormone Genotropin. It also makes the anti-glaucoma medication Xalatan and bladder control treatment Detrol/Detrusitol.
With all of the talk of consolidation in the industry, Pharmacia may be looking for a merger partner to avoid being the target of a hostile takeover bid, Zisson said.
"I think every company is thinking, ‘we would rather be an acquirer or do a merger of equals than being taken over,’” he said. 
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