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P&G drops merger talks
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January 24, 2000: 4:00 p.m. ET
Cancels merger talks with drug makers Warner-Lambert, American Home
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - Procter & Gamble Co. broke off merger talks Monday with drug makers Warner-Lambert Co. and American Home Products Corp. -- a deal that could have created one of the world's largest pharmaceutical companies.
After P&G called off the discussions, Warner-Lambert said it is continuing to negotiate with Pfizer Inc. on Pfizer's unsolicited $77 billion takeover bid and is considering other strategic alternatives. P&G's exit from the takeover battle makes Pfizer much more likely to prevail in its attempt to break up Warner's $56 billion merger deal with American Home, drug industry analysts said.
Procter & Gamble (PG), maker of Tide detergent, Crest toothpaste and other household products, was interested in acquiring one or both drug companies as a way to build up its small pharmaceutical unit.
But the company cited rampant media speculation as the reason for calling off the talks.
"We had been in discussions with Warner-Lambert and American Home Products over the past three weeks," P&G CEO Durk Jager said. "Now, however, we have concluded that leaks and resulting speculation on a possible transaction have created an environment in which we cannot continue meaningful discussions."
Three's a crowd?
But, analysts said that the Cincinnati-based consumer products maker was also listening to nervous stockholders, who unloaded their shares en masse last week amid wariness that such a major acquisition would slow the company's earnings growth and could spark a bidding war with Pfizer. P&G stock dropped about 10 percent on Friday alone on reports that the company's board was meeting to consider options regarding Warner and American Home.
After Monday's announcement, the Dow industrials stock immediately began to rebound, before closing down 243.54 for the day at 11,008.47.
"Clearly last week the stock market and the investors had been sending a signal to Procter & Gamble management that this deal may be too complex and too complicated for the company to embark upon," said Mariola Haggar, fund manager at health care investment fund Haggar Concord Partners. "I think that it was only prudent to really stop and reconsider."
P&G shares rebounded Monday on news the company had called off merger talks
The takeover battle brewing in the pharmaceutical industry centers around Warner-Lambert, which has become one of the world's fastest-growing drug makers through the success of its blockbuster cholesterol-lowering agent Lipitor. Warner-Lambert co-markets the lucrative new drug with Pfizer.
Morris Plains, N.J.-based Warner-Lambert (WLA) also makes consumer products such as Certs mints and Trident gum, which would have presented a good fit with P&G, Haggar said.
Warner-Lambert has been seeking a "white knight" suitor that would ward off Pfizer. But, Haggar said, any P&G-Warner arrangement also likely would have required Procter & Gamble to buy Madison, N.J.-based American Home (AHP) - which continues to operate under a cloud left by its role in the diet drug combination known as "fen-phen." The so-called diet cocktail has been linked to heart valve problems.
"It looked like it was all or nothing transaction," Haggar said. "I think in terms of merger integration, two-way integration is difficult enough. Three-way integration becomes even more difficult and clearly carries more risk."
A purchase of American Home and Warner-Lambert -- the fifth- and seventh- biggest U.S. drug companies respectively according to the Fortune 500 -- would have totaled at least $140 billion. In comparison, P&G's biggest acquisition to date was last year's $2 billion purchase of pet food maker Iams.
Procter & Gamble has no plans to reopen talks with the two drug companies, "but we never close the door to anything," company spokesman Simon Denegri said.
Meanwhile, the Wall Street Journal reported Monday that several weeks ago Procter & Gamble sought to discuss a possible merger with razor maker Gillette Co. (G), but backed away after Gillette responded negatively.
Pfizer position strengthened
Analysts said Monday's news clearly benefits New York-based Pfizer, the No. 3 U.S. drug maker according to the Fortune 500 list and maker of the popular male impotence remedy Viagra.
If P&G had bid for the companies, said Brown Brothers Harriman analyst Michael Krensavage, then Pfizer likely would have had to significantly increase its bid, which now stands at about 40 percent higher than the American Home deal.
"As it stands now, I don't think Pfizer will have to raise its bid significantly," he said. "Maybe another drug company would step in (a third-party suitor), but I don't know who else would."
In late afternoon trading, Warner-Lambert stock lost 4-11/16 to 87-5/16, while American Home dropped 5-1/2 to 42-1/2, during a generally weak session for pharmaceutical stocks.
Pfizer traded down ¾ at 34-5/16 in late afternoon trading. 
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