Within the executive ranks at

Procter & Gamble

(PG) - Get Report

, there is frustration that investors, fueled by leaks and speculation, rejected a potential three-way merger with drugmakers

Warner-Lambert

(WLA)

and

American Home Products

(AHP)

.

The merger discussions were cancelled Monday after shares of P&G continued to plummet on investors' aversion to the deal.

That led P&G CFO Clayt Daley to voice his anger Tuesday during a conference call following the company's strong, yet lower-than-expected, earnings report.

The call was not open to the press, but analysts who participated said that Daley was clearly annoyed that the market rejected the deal, saying that investors overreacted.

Argus Research

analyst Daniel Perris said that Daley went on to make a more convincing case for the acquisition than earlier press reports did. In particular, Daley said that the deal would have allowed P&G to use its enormous branding advantage and market reach to sell new and existing drugs.

However, P&G CEO Durk Jager said Monday that the company felt compelled to abruptly drop the merger discussions after investors lopped about 19% off the company's shares after rumors about the talks started circulating last Wednesday.

Investors had been soured by both the scope and the size of the acquisition. The deal would have made a pharmaceutical giant out of P&G, which is known better for its staple consumer products such as Tide detergent and Crest toothpaste.

"Those who choose to invest in soap and toothpaste are making a targeted choice, and to reshape the company probably caused many of them to rethink their investment," said Perris.

Jager has publicly stated in the past that he would reinvent P&G internally and through acquisitions. But for the shareholders of the company, the drug trade may not be the best way to do that.

They might be more comfortable with a more apples-to-apples approach, such as Jager's recent unsolicited bid to buy

Gillette

(G) - Get Report

, although that particular deal was promptly snuffed by the company best known for its shaving products.

Another major investor turnoff for the deal with American Home Products and Warner Lambert was the $140 billion price tag, the majority of which would have been paid for with P&G stock.

"Share owners didn't seem sure that they wanted to commit so much stock for a company-transforming deal," said Perris. A cash-and-stock deal would have been a departure for P&G, which often makes all-cash deals, such as last year's $2 billion acquisition of pet-food-maker

Iams

.

Analyst William Steele at

Banc of America Securities

said that the company is probably "still looking for other opportunities," but it is hard to tell just what the threshold is for an acquisition before it has to start using stock to supplement its cash.

Meanwhile, P&G Tuesday reported healthy earnings for its fiscal second quarter, although charges related to new research-and-development practices pushed earnings lower than Wall Street had expected.

The shortfall came despite record volume sales for the consumer-products maker.

P&G reported fiscal second-quarter net earnings Tuesday of $1.13 billion, or 78 cents per diluted share. Without charges related to its Organization 2005 R&D program, the company earned 88 cents per share for the quarter, a 13% increase over the previous year's 78 cents per share.

Analysts surveyed by

First Call/Thomson Financial

had expected P&G to earn about 88 cents per share for the quarter.

The company said that Organization 2005, designed to bring new products to the market faster, resulted in charges of about $137 million for the quarter. It noted, however, that the initiative helped drive the company's single largest sales increase since 1997.

Net sales for the quarter rose 7% to a record $10.59 billion, according to the release.

For the first six months of its fiscal year, the company reported net earnings of $2.27 billion, or $1.58 per share.

P&G also said that it still supports analysts' estimates of about $3.22 per share for fiscal 2000 earnings.

The company has also upgraded its outlook for fiscal year 2001 and beyond, its internal expectations targeting earnings growth in the 13% to 15% range, mostly due to the Organization 2005 program.

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