American Home, Warner-Lambert Set $72 Billion Merger Deal

Now that American Home Products (AHP) and Warner-Lambert (WLA) have agreed to a $72 billion merger, the questions remains: Can they pull it off?

The merger will create a company -- to be named AmericanWarner -- with pro forma sales of $26 billion and a $3 billion research-and-development budget. The R&D budget would be one of the industry's largest, which is crucial for companies trying to keep earnings growing even as they invest heavily on complex drugs to treat maladies such as cancer and AIDS.

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Any skepticism over the deal, which was announced early Thursday morning after reports broke Wednesday, stems from American Home's failure over the last two years to close a pair of widely discussed deals.

"American Home's track record in this area is suspect," said Tom Burnett, the president of institutional researcher Merger Insight, referring to American Home's failure to close 1998 deals with SmithKline Beecham (SBH) and Monsanto (MTC). "They'd better be focused this time."

If investors are worried about the prospect of the deal falling apart, they weren't letting on. Warner-Lambert and American Home shares were higher Thursday morning after the stocks of both companies rallied sharply Wednesday on reports of the deal. [American Home ended down 1 at 55 while Warner-Lambert closed up 6 5/16 to 90 1/8.]

Hemant Shah, an independent analyst, sees much potential for an amicable union. If the deal dies, though, Shah predicts it will be because of American Home's $3.75 billion settlement with plaintiffs over the firm's diet drugs.

"That's the one thing that could scuttle it," said Shah, who rates Warner-Lambert buy and American Home neutral.

American Home executives scoff at the suggestion that the diet drug settlement will kill the merger. They say the deal should be completed by mid-2000.

"From the company's perspective, that issue has been dealt with and set aside," says American Home spokesman Doug Petkus. "The companies can deal with this together."

Burnett said he was leaning toward agreeing with American Home's viewpoint, saying Warner-Lambert's management has a reputation for being stable and that it wouldn't enter an agreement without careful consideration.

"Doesn't Warner-Lambert know about [the settlement]?" Burnett asked. "I mean, they're not coming into it blindly, and the whole timing was critical because they waited until there was a settlement." At the same time, Burnett added that if the fen-phen agreement fell apart, there could be severe ramifications.

Analysts say that they don't anticipate that management ego clashes will destroy the deal, as they reportedly did with American Home's talks with SmithKline in January 1998, if only because there appears to be some executive symmetry.

John R. Stafford, American Home's chairman, president and chief executive, is known as a strong-willed leader. Stafford will become chairman for 18 months before retiring, according to a joint press release from the companies. Lodewijk de Vink, Warner-Lambert's chairman, president and chief executive, who has a more diplomatic reputation, would then take over upon Stafford's retirement.

Both Shah and Burnett said the merger could set off a stream of agreements from competitors looking to keep up. At the same time, both analysts said the American Home-Warner Lambert deal simply takes its place in line with a decade's worth of deals that is likely to continue. Shah said investors should expect further consolidation in the industry. "There's a lot of discussions going on," Burnett said.

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