Monsanto, Pharmacia Tumble as Investors Frown on Merger Deal

The deal would create one of the world's largest pharmaceutical companies.
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Wall Street frowned at the news of a merger between pharmaceutical giant

Pharmacia & Upjohn

(PNU)

and life sciences company

Monsanto

(MTC) - Get Report

, as shares in both companies plunged in Monday morning trading.

St. Louis-based Monsanto fell 5 7/8, or 14%, to 35 7/8, while Pharmacia, out of Peapack, N.J., dropped 4 1/8, or 8%, to 46 1/8 in afternoon trading. (Monsanto finished down 5 1/8, or 12%, to 36 5/8, while Pharmacia closed down 3 1/8, or 6%, to 47 1/8.)

Under the terms of the $27 billion all-stock deal, announced Sunday, the two companies will combine in a so-called merger of equals. The merged company will spin off as much as 19% of Monsanto's agribusiness unit, which has been plagued by litigation and criticism over its development of genetically modified crops.

The deal would create one of the world's largest pharmaceutical companies, with estimated 1999 sales of $17 billion and a market capitalization of more than $50 billion.

Analysts called Wall Street's disdain for the deal overblown. Investors may be disappointed by only a partial spinoff of the agribusiness division, which has been a persistent drag on Monstanto's stock price, but the 19% was probably as high as the companies could go for tax reasons, said Corey Davis, analyst at

Chase H&Q

. Chase H&Q does not have an investment banking relationship with either company. Davis rates Pharmacia a neutral and doesn't rate Monsanto.

Investors are also disappointed that neither company is fetching a premium in the deal, analysts said.

Monsanto "left a little money on the table" with regard to its agribusiness unit, said Christine McCracken, an analyst who covers Monsanto for

Midwest Research

in Cleveland. "I don't understand the timing of this," she said. "Had they waited another six months, when their crops were in the ground, they might've done better."

But some on Wall Street say time was running out for Monsanto to make a deal. "It was getting close to the clock striking midnight," said Sano Shimoda, president of

BioScience Securities

near San Francisco. "It was showtime for the company." BioScience does not have an investment banking relationship with either company. Shimoda rates Monsanto a hold and doesn't rate Pharmacia.

Monsanto officials may have felt that Pharmacia made for an ideal partner, given the complementary drug businesses between the two, and Pharmacia's recent flirtation with

American Home Products

(AHP)

may have forced Monsanto's hand, McCracken said. She rates the stock a buy, though she said she is revisiting that in the wake of the merger. Midwest Research does not do any investment banking.

What likely made Monsanto hugely attractive to Pharmacia was the introduction of

Celebrex

, a blockbuster arthritis drug, by Monsanto's pharmaceutical division,

G.D. Searle

. "The deal gives Pharmacia a powerhouse drug in Celebrex, which in this business is sometimes all you need," Davis said.

Pharmacia & Upjohn produces drugs including

Xalatan

, the best-selling glaucoma drug, ands

Rogaine

, the hair-growth treatment. The company also makes

Nicorette

, a gum that reduces tobacco dependency.

Monsanto shareholders, who will receive one share of the combined company for each Monsanto share, will own 51% of the new entity. Pharmacia shareholders will get 1.19 shares of the new company for every Pharmacia share they own.

The deal comes after Monsanto failed to merge with American Home Products last year. Prior to coming to terms with Pharmacia, Monsanto was rumored to be in talks about merging with

DuPont

(DD) - Get Report

and

Novartis

.

The agreement is the latest in a recent frenzy in the pharmaceutical category. For example,

Pfizer

(PFE) - Get Report

is attempting a hostile takeover of

Warner-Lambert

(WLA)

, which had agreed to a friendly merger with American Home Products.

Davis said he doesn't expect the Pharmacia/Monsanto deal to have much of a direct impact on the Warner-Lambert imbroglio, though it does heighten attention on the increasing consolidation in the sector.

Fred Hassan, the 54-year-old chairman and CEO of Pharmacia, will be president and CEO of the new company. Robert Shapiro, 61, the chairman and CEO of Monsanto, will be nonexecutive chairman of the combined entity, which has yet to be named, for 18 months.

The merger, which must be approved by shareholders and regulators, is expected to close in the second half of 2000.