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Pension funds press W-L
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January 12, 2000: 1:13 p.m. ET
Big investors question drug maker's strategy in takeover fight with Pfizer
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - Two of the nation's largest pension funds have written to Warner-Lambert Co., raising questions about the company's planned merger with American Home Products Corp. and telling the drug maker that it has a duty to consider Pfizer Inc.'s rival takeover bid.
As the three companies prepare for a February trial in the takeover fight, Warner-Lambert faces increasing scrutiny from investors about its strategy to go forward with the American Home deal. Pfizer's all-stock bid is worth about $72.5 billion under current stock prices, compared with an estimated $52.8 billion for the American Home stock swap deal.
In recent letters to Warner-Lambert's chairman, Lodewijk J.R. de Vink, neither the California Public Employees' Retirement System (Calpers) nor the New York City Pension Funds took sides in the takeover brawl. But the two funds said Warner-Lambert's board of directors had a duty to seriously consider rival bids.
"The refusal of Warner-Lambert's board to give due consideration to the Pfizer offer, and the coercive provisions of its agreement with AHP ... effectively deny shareholders the right and opportunity to enhance their investments," New York City comptroller Alan G. Hevesi, the pension funds' investment adviser, wrote Jan. 5.
"In my view the board has committed an egregious breach of its fiduciary duty," he wrote.
In a Dec. 17 letter, Calpers CEO James E. Burton said that while sometimes litigation is unavoidable, he was concerned that a lengthy court fight would not be in shareholders' interests.
The fund "strongly believes that every reasonable effort should be made to resolve conflict before the dedication of significant corporate assets toward litigation... I am forced to ask whether you have in fact used reasonable efforts to avoid what will surely be an expensive, divisive and yet not necessarily productive series of lawsuits," he wrote.
The stance taken by the two pension funds is particularly significant because they are such weighty shareholders. Calpers is the largest pension system in the U.S., with about $161 billion in assets. It holds 3.7 million shares of Warner-Lambert stock, as well as 19.5 million shares in Pfizer, the No. 2 U.S. drug maker after Merck & Co. (MRK), and 6.4 million American Home shares.
The New York pension fund owns 3.5 million Warner-Lambert shares, 15 million Pfizer shares and 5.6 million shares of American Home.
The letters were first disclosed by The Wall Street Journal Wednesday. Warner-Lambert spokeswoman Carol Goodrich declined to comment on the letters, but said the company planned to respond soon.
Goodrich reiterated the company's stance that
Warner-Lambert's agreement with American Home allows the company to consider third-party merger proposals, but that Pfizer's offer is conditional and not capable of being completed.
"We have not asked the court to bar Pfizer from making an offer," she said. "We're still waiting for an unconditional offer."
The Delaware Chancery Court is scheduled to hold a one-week trial in the case beginning Feb. 14.
At issue are Warner-Lambert's claims that Pfizer has violated the terms of their joint pact to market Warner's blockbuster cholesterol drug, Lipitor, which recorded an estimated $1 billion in sales last year. The Lipitor agreement includes a so-called "standstill pact" that restricts either company from participating in a takeover bid of the other partner.
Meanwhile, Pfizer wants the court to rescind Warner-Lambert's deal with American Home and to preserve the Lipitor marketing agreement. "We're kind of in a state of limbo until the Delaware court will begin that trial," said Kent Blair, pharmaceuticals analyst at Donaldson, Lufkin & Jenrette.
Meanwhile, the board of the Council of Institutional Investors, which represents more than 100 pension funds, is drafting a brief to submit to the court that also will urge Warner-Lambert to consider the rival bid.
"We are not taking sides," said Ann Yerger, director of research at the council. "The issue here is the generic principle that directors should have an obligation to stop, look and listen."
Pharmaceutical analyst C. Anthony Butler, of Lehman Brothers, said that it's unclear whether Warner-Lambert board's can legally consider the Pfizer bid, but that there is a principle involved that companies need to entertain rival bids that may be better for shareholders.
"At the end of the day, you want the highest price and the best combined company to be the winner," he said.
When American Home and Warner-Lambert announced their "merger of equals" plan Nov. 4, the deal was valued at $72 billion. But the deal's value has fallen by more than 25 percent since then, as American Home shares have dropped amid ongoing concerns about litigation over the "fen-phen" diet drug combination.
American Home, of Madison, N.J., has reached a multibillion-dollar settlement over its role in the diet drug cocktail, which has been linked to heart-valve damage and other medical problems. But individual lawsuits from former users are still a potential wild card facing the company.
Warner-Lambert's development of Lipitor has catapulted the Morris Plains, N.J.-based firm from a mid-sized consumer products maker to a fast-growing pharmaceutical company, making it an attractive merger target for rival drug firms.
Many industry analysts say they expect New York-based Pfizer, maker of the Viagra male impotence drug, will ultimately prevail in the fight, but Butler notes there also is a possibility that a "white knight" company could step in and make a proposal that beats either the American Home or Pfizer bids.
In midday trading on the New York Stock Exchange, Warner-Lambert (WLA) stock rose 1-3/16 to 87-1/16, American Home Products (AHP) climbed 13/16 to 42-5/16 and Pfizer (PFE) gained 1-1/16 to 35-1/16. 
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