The winners

A number of outside parties, such as law firms, banks and investors, stand to make a lot of money from mergers going ahead and often subtly drive the process forward behind the scenes — even when initial offers are rejected by takeover targets. According to the Wall Street Journal, over a threemonth period in 2009, pharmaceutical company merger and acquisition activities generated $500 million in advisory fees for investment banks.⁵ At a time when the financial sector was struggling, pharmaceutical industry tie-ups were providing banks such as J.P. Morgan Chase, Goldman Sachs Group, Citigroup and Morgan Stanley with vital business.⁵

For speculators in the stock market, pharmaceutical mergers are also extremely lucrative and their desire for personal profit adds to the interest in seeing takeovers reach a successful outcome. In August 2008, King Pharmaceuticals made an offer of $1.6 billion for Alpharma Inc, but resistance from Alpharma drove its share price up.⁶ Alpharma's shares had actually been trading at $22.15 per share, but King Pharmaceuticals bid $34 per share.⁶ Alpharma then actually advised those holding its shares to retain them as it expected King Pharmaceuticals to further extend its offer. The waiting game paid off and King Pharmaceuticals finally raised its offer to $37 per share, providing those holding onto shares with additional profit.⁷ On the finance side, Credit Suisse and Wachovia Securities benefited through advisory fees.⁷

The reason for this sudden lower offer from Roche was primarily because Genentech's share price on the market had actually dropped by early 2009.⁹ Roche had hoped to entice shareholders to part with their shares given the prevailing financial climate. However, this move was widely unpopular among shareholders and analysts. According to media reports, of 59 Genentech shareholders surveyed by Citigroup, over 90% said they would not be prepared to accept the Roche offer and indicated that $97 per share was the minimum requirement.⁸ Interestingly, Roche reported that Goldman Sachs, Genentech's financial advisor, had actually proposed $112 a share as an acceptable price!⁹ A dramatic increase per share offer by Roche was considered unlikely, but since Roche had already been looking for ways to finance a takeover, many analysts considered the course inevitable.⁹ In effect, it was simply a case of the scale of the improved Roche offer. There had also been a previous indication of Roche's behaviour in the takeover arena, when it tried to takeover Ventana. Roche's initial offer of $75 a share had been rejected by Ventana and so the bid had to be increased to $89.50 per share.⁹ Not surprisingly, Genentech shareholders were rewarded for their persistence and in March 2009, it was announced that Roche would acquire all outstanding shares in Genentech for $95 per share.¹⁰

The losers?

Despite the apparent routine nature of their occurrence, the financial effort of pulling off mergers of the scale of Pfizer, Merck and Roche are quite demanding.¹¹ Although it is the world's largest pharmaceutical company and had a large cash reserve, Pfizer reportedly struggled to borrow the money it needed to complete its merger with Wyeth due to the ongoing credit crisis.¹² It was recently reported that of the $68 billion required for the Wyeth deal, a third came from Pfizer's reserve cash, a third from new Pfizer shares and a third from bank loans.¹²

The expense of merger dealings also means that earnings suffer and the companies are under immediate pressure to react to the costs incurred. While mergers may benefit a number of outside parties focused on share prices, they come as a worry for those within the companies concerned. For example, when Pfizer took over Wyeth, the deal was followed by the shedding of 19 500 jobs and a number of closures of manufacturing plants and R&D facilities.^2,13 A blog in the Wall Street Journal actually poked fun at Pfizer due to inconsistencies in its official statements.¹³ Pfizer had stated that the cuts would affect 15% of the combined workforce, but calculations based on figures of the number of personnel from the companies worked out at less than the 19500 jobs cited.¹³ Initially, Merck announced that 16 500 jobs would be lost as a result of its merger with Schering-Plough but in January 2010 it revealed that an additional 500 sales jobs would be lost.¹⁴ As Pfizer and Merck continue to evaluate the impact of their recent takeovers, more job losses are expected.¹⁴

Roche is in a similar position; it reported that its year-to-date profits had dropped by one-fifth soon after the Genentech takeover, with much of this reduced performance owing to the costs related to its buyout.¹¹ However, Roche seems to have taken care to preserve the Genentech culture considered vital to the biotech output of the company, and aimed its cuts at its existing workforce.¹⁵ The company has admitted that Roche's concerns over losing Genentech employees has led to the integration being handled differently to previous acquisitions.¹⁵

Another outcome of the recent big merger deals is that they put pressure on other large pharmaceutical companies to follow suit. In particular, speculation has centred on companies such as AstraZeneca, Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson and sanofi aventis.¹ One company that is also often mentioned is GlaxoSmithKline, which is ranked number two in size after Pfizer, but has distanced itself from mergers. Its CEO has stated the company's intention is to focus on its own R&D efforts¹ but with Pfizer having recently taken on Wyeth, pressure will grow on it to strengthen its market position. There is already speculation in the stock market that GlaxoSmithKline and sanofi aventis is targeting Genzyme, with some analysts placing an outside bet on Johnson & Johnson trying to step in.¹⁶