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Truth Serum: American Home at the Altar? Not So Fast

The big drug company may get hitched, but not until it weighs its diet-drug liability.

Hey, you're getting killed in your

American Home


and the masses won't listen to your persuasive

arguments about its pretty pipeline of products.

What's left to do but spread a takeover rumor?

And so the rumor was passed and so the stock ran. On Wednesday it rose 2 5/8, or 6%, to 44 1/2, more in reaction to the stock's recent thrashing than to the talk. The options moved -- after the rumor went around. The wires and even the intrepid reporting staff of

The Wall Street Journal

scrambled to put out feelers.

On Thursday, American Home added another 1 1/8, about 2.5%, to close at 45 5/8.

For its part, the company stuck by its policy and declined to comment. Spokesman Lowell Weiner, however, disclosed Wednesday night that he was leaving his office early to catch his daughter's camp play,

Charlie Brown

. Truth Serum hopes she played Lucy and not a tree.

An American Home takeover rumor makes some sense. (They all do, don't they?) But there is one big question mark: American Home's overhanging, unknowable and potentially gargantuan legal liability. The company faces litigation from a pair of drugs that are actually easier to take than that


video and eating five vegetables per day:





The catch: They were associated with heart valve problems before being withdrawn from the market two years ago. Wall Street doesn't know how much money the suits are going to cost, and as each trial unfolds, the stock will be accordingly volatile.

Yet some observers think liability in itself isn't a big hurdle. "It's not as implausible from my standpoint as others might think," one major Boston-area health care money manager says. "My only point is, what's scary for investors is a reasonably quantifiable negotiating point" for two companies in merger talks.

You see, to a financial purchaser, it's all numbers on a ledger. A merger of equals with American Home would create a roughly $100 billion company. Say the liability turns out to be $10 billion. After a merger, that goes from being 20% of American Home's market cap to 10% of NewDrugCo's.

More significantly, a buyer won't have to pay the liability all at once. It's a reasonably easy net present value equation. You figure how much American Home's worth if the liability turns out to be between $5 billion and $15 billion. It turns out it's a small number in relation to a $100 billion transaction. We won't walk you through the calculations, because sleeping at your computer is unhealthy.

The other added bonus of a merger is that the two companies would be able to take a big, one-time charge and increase the liability reserve that American Home has now, which is estimated at around $1 billion to $2 billion. The companies wouldn't want to say how much they have in reserves, because that says to the plaintiffs' lawyers: Here, this is how much we are prepared to give to you sharks.

That said, American Home is cheap. And Sir Richard Sykes, the chairman of

Glaxo Wellcome


, the name bruited about as the acquirer, has his hounds, trumpet and hunting pinks at the ready.

The knight you see, has virtually no pipeline of new drugs and has repeatedly said he wants to get big and nasty to compete in the nasty and big worldwide pharmaceutical business. (Glaxo also has a policy not to comment.)

And yet it still ain't gonna happen anytime soon.

Jack Stafford, the CEO and chairman of American Home, screwed up two mergers last year, first with the Brits at

SmithKline Beecham


and next with




He'll be pretty careful this time around. What's more, he's sitting on five products about to be launched and is probably thinking the worst is behind the company. Glaxo, even though the net present value calculations are easy to do, probably wouldn't mind some better sense of the liability size.

And in a possible deal of this size, with this kind of liability out there, a little comfort would go a long way.

We're depending on our readers for sources, rumors and ideas. Send any to our Truth Serum hotline at