Glaxo SmithKline deal exposes pitfalls of an ego-led strategy

A Glaxo/SB merger may be more fitting now than two years ago, but the clash of egos which stalled the first deal has cost shareholders dearly, says George Pitcher.

Someone once said that time exists to stop everything happening at once. In terms of consolidation in the global pharmaceuticals market, most markedly expressed by this week’s news that Glaxo Wellcome is to merge with SmithKline Beecham (SB) in a &£114bn deal, nearly two years has elapsed between the first announcement that these combines were coming together and consummation of a deal.

In the Nineties – as we can now say from the vantage point of the Noughties – a good deal happened all at once, or so it seemed. American Home Products (AHP) acquired Cyanamid, then Upjohn of the US merged with Sweden’s Pharmacia. Glaxo acquired Wellcome and Sandoz and Ciba-Geigy created Novartis. At the end of the decade, the all-US hostile &£52bn bid from Pfizer for WarnerLambert was launched and still runs.

In 1998, SB made a &£75bn play for AHP, before deciding that it preferred the prospect of a merger with Glaxo. The Glaxo deal then fell apart amid recriminations over management succession issues. As time passed, we wondered whether it was less to do with everything happening at once than – in SB’s case – anything happening at all.

But the other thing that time does is age us and, eventually, kill us. The important principle to understand here – and too few chief executives do understand it, obvious though it is – is that companies are bigger than the individuals who run them. As we can see from the corporate corpses that litter the 20th century, companies aren’t immortal, but they do tend to have greater longevity than those who run them.

So it is that the best interests of SB and Glaxo transcend the personal ambitions and globally-sized egos of SB’s chief executive Jan Leschly, and Glaxo’s chairman Sir Richard Sykes. It was said that the proposed deal of early 1998 between these two leviathans foundered on negotiations as to which of them would have the ultimate shout over the combined businesses. Since then, Sir Richard has let it be known that he is called by the groves of academe; Leschly is to retire this April, some months earlier than expected. Tempus fugit.

If it was the case that industrial logic was frustrated by issues of personality, then it is a simple passage of time that has resolved those issues. But it’s worth reflecting that, some two years ago, the City’s institutional shareholders were anticipating about &£13bn-worth of shareholder value being released from an SB/Glaxo deal.

If that investment opportunity was squandered by the intractable egos of the principals involved, then we’re entitled to ask what is the equivalent shareholder value that they have delivered shareholders over the intervening two years in a raging bull market that has been kind to the pharmaceuticals sector. Shareholders might also like to ask whether the remuneration packages of the principals properly reflect delayed delivery of the value of this deal over the intervening period.

In fairness, a lot has changed other than the immediate career prospects of Sir Richard and Leschly. While the share prices of both companies have underperformed market indices, SB has performed less badly than Glaxo, meaning that the deal today is far more of a merger of equals than a takeover by Glaxo. Still, one wonders whether the difference between a merger and a takeover is a distinction that exercises boardrooms rather more than it does shareholders.

A better point is that SB and Glaxo could afford to let industry consolidation largely play itself out before deciding on the best growth option available. By the end of the last decade, half the world’s top 25 drugs companies have announced mergers. One very significant element of this consolidation was the creation of AstraZeneca, which has a 4.2 per cent share of the world market compared with Glaxo SmithKline’s projected 7.4 per cent, and which is – importantly – London-based.

The competitive objections to Glaxo SmithKline are, accordingly, muted. One might add that Germany’s Hoechst has since merged with France’s Rhone-Poulenc to create Aventis, a combine bigger than either SB or Glaxo alone, which adds further comfort on a pan-European basis for competition regulators.

All these factors serve to make a deal between the drugs giants perhaps more compelling today than it was two years ago. But, despite all that, I wonder whether there wasn’t a case for SB and for Glaxo being in the vanguard of developments, rather than following them.

At the time of the original talks I wrote that it was some relief that such commercial concerns were driven by people with human frailties, such as vanity, rather than by faceless automatons. I have to say, two years on, that such a remark might ring a little hollow to shareholders who have had to tolerate the consequences of underperformance in the interim.

There is no easy solution to suggest for the downside of personality cults at the top of vibrant and developing industries. Indeed, talented industry leaders probably contribute much more in terms of shareholder value than they cost in terms of personality clashes and frustrated deals.

But, in a week when it has been announced that Sir Peter Davis, chief executive of the Prudential (and he of the television commercials), is to be chief executive of ailing Sainsbury’s – a subject to which I will return shortly – I wonder whether it’s time to keep accountability for our top executives very top of mind.

George Pitcher is a partner of issue management consultancy Luther Pendragon.


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