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Monsanto, P&U to merge
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December 20, 1999: 5:12 p.m. ET
Drug makers disclose plans for $26.6B merger; agribusiness IPO is slated
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NEW YORK (CNNfn) - Life sciences company Monsanto Co. and drug maker Pharmacia & Upjohn Inc. Monday agreed to merge in a $26.6 billion stock transaction, and announced they will sell off part of Monsanto’s troubled agriculture business in an initial public offering.
Monsanto shareholders will exchange each of their shares for one in the combined company in what was described as a merger of equals without a premium. Pharmacia stockholders will get 1.19 shares for each share they own, valuing them at 1.1 percent below Friday's close of 50-1/4. Monsanto shareholders will own 51 percent of the combined company.
For Monsanto, selling up to 20 percent of its farm products business in a separate IPO ends months of speculation about what it would do with its agribusiness unit, and ends a long search for a suitable partner.
For Pharmacia, the agreement adds Monsanto's successful arthritis drug Celebrex to a host of new products that have helped it reverse its recent troubles as a newly merged company of its own.
"This merger is truly a merger of strength; we feel very good about this,” Pharmacia CEO Fred Hassan, who will be head of the combined company, told CNNfn. "You have two fast-growing pharmaceutical companies that are coming together, and we’re going to make this into a global pharmaceutical powerhouse.”
Agriculture IPO
The agreement will create the world's 11th-biggest drug company with total sales of $17 billion and an arsenal of blockbuster drugs, including $10 billion in prescription sales. The combined market capitalization of the two companies totals more than $50 billion.
Even so, investors were rattled by several aspects of the deal, particularly how the combined company plans to deal with Monsanto’s ill-fated agricultural unit as well as the additional costs associated with the merger agreement.
As much as 20 percent of Monsanto's agricultural unit, which makes genetically altered corn and soybean seeds along with the top-selling weed killer Roundup, will be sold through an IPO shortly after the merger closes. Monsanto's shares have declined more than 18 percent this year because of investor concern about its agribusiness, which has been rattled by consumer resistance to bio-engineered products.
"The virtue of the IPO is that we are listening to what some of our investors have said with wanting to have a separate investment vehicle on the one hand and agriculture on the other,” explained Robert Shapiro, Monsanto's current chairman and chief executive. "This provides one way of approaching that.”
Investors didn’t agree. Both companies’ shares declined Monday on concern that divesting that segment of the business may not come quickly enough, along with the fact that the arrangement offers no premium to either company’s shareholders and carries a $575 million break-up fee.
Monsanto (MTC) shares closed down 5-1/8 at 36-5/8, while Pharmacia (PNU) shares closed down 3-1/8 at 47-1/8. The merger also is expected to cost $800 million to complete.
No premium
"A lot of people were expecting a premium on the deal and a lot of people weren’t expecting a long-term plan for the ag-business,” said Sano Shimoda, president of Bioscience Securities, based in San Francisco. "The road is going to get rocky in the short term, but longer term it’s a good place to be.”
Shimoda’s expectation is that the agricultural business will improve over the next two to three years, giving the combined company an 80 percent stake in its agribusiness unit "that has a lot of potential to appreciate,” he said. He currently rates Monsanto’s stock a "hold,” with a mid-term target of "around 40.”
Indeed, the agricultural-chemicals 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.
The yet-to-be-named Monsanto-P&U combination will boast a medicine chest of top-selling drugs to treat ailments including arthritis, glaucoma, colorectal cancer and insomnia. The companies expect their merger will achieve annual cost savings of more than $600 million, some of which they plan to reinvest in the company.
Bigger, better, stronger
For some analysts, the merger means a bigger, better and stronger company that will be able to focus on developing core products and boost it to the same level as some of its more prominent and diversified competitors.
"Pharmacia & Upjohn is a decidedly better company with this deal," said David Saks, an analyst at Gruntal & Co. strategic growth funds.
"The merger will put it in the major leagues,” boosting Pharmacia’s market capitalization to a size comparable to industry heavyweights such as Warner-Lambert (WLA), Schering-Plough (SGP) and Eli Lilly (LLY).
Others, though, were a little more cautious about the long-term outlook of the combined company, particularly since it’s a merger of equals with few details about what the combined company will look like.
"Any merger creates a problem, especially a merger of equals where you have a lot of integration teams and everyone is trying to do the right thing,” said Alex Zisson, a pharmaceutical analyst at Chase H&Q. "I’m sure there will be a little uncertainty with the combined companies’ long-term plans.”
Musical chairs
Shapiro will hold the post of chairman of the new company for three years, after which he will be succeeded by Hassan. The new company’s headquarters will be in Pharmacia's U.S. hometown of Peapack, N.J., which also will house the drug unit. The agribusiness division will remain in St. Louis, where Monsanto is based.
Monsanto and Pharmacia said they plan to offer up to 19.9 percent of the agribusiness unit in an IPO and will operate it as a separate legal entity with its own stock and board of directors.
Analysts credited Hassan with turning around the troubled merger of Pharmacia & Upjohn when he joined in 1997 from American Home Products Corp. (AHP), where he previously led the integration of American Cyanamid, a leading agrochemical company purchased by AHP.
Search is over
The arrangement ends several years of merger discussions between Monsanto and numerous other drug and agribusiness companies. In the past two years Monsanto has held merger talks with American Home, Novartis AG and DuPont Co. (DD), and has told investors it is considering all options to boost its languishing stock price.
Pharmacia, which was formed through the 1995 merger of Sweden’s Pharmacia AB and Upjohn Co., has introduced two new drugs recently, Xalatan, the world's top-selling glaucoma drug, and the incontinence pill Detrol, which helped power sales and reverse its ailing performance.
Until last year, Pharmacia lagged rivals as it relied on older drugs such as its anxiety medicine Xanax. The company’s best-selling drug is the growth hormone Genotropin. Pharmacia, the 16th-largest U.S. drug maker, and Monsanto, ranked 18th, have similar market capitalizations: $26.3 billion for Pharmacia and $28 billion for Monsanto.
"I’m sure that Monsanto has knocked on a lot of doors to find the right deal,” Shimoda said. "It appears this deal works for both sides over the long term, which will be good for shareholders.” 
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