GLAXO WELLCOME AND SMITHKLINE BEECHAM:
THE MERGER PROPOSALS
1. On 30 January 1998 Glaxo Wellcome plc and SmithKline
Beecham plc announced that they had entered talks with a view
to merging and that SmithKline Beecham had terminated its merger
talks with American Home Products (AHP). City reaction to the
proposal was enthusiastic; share prices in both companies shot
up. The deal would have created the world's largest pharmaceutical
company and, in terms of market capitalisation, the third largest
company overall. On 23 February 1998, after twenty three days
of talks and before we had examined the participants, SmithKline
Beecham announced that the negotiations had been terminated amid
suggestions that Glaxo Wellcome had failed to abide by earlier
agreements and rumours of insolvable differences between the two
boards.
2. Our interest in the merger resulted from its potential
impact on the UK's science base. Both Glaxo Wellcome and SmithKline
Beecham are giants in terms of their research and development
(R&D) expenditure: in 1997 they ranked first and second, respectively,
in the Department of Trade and Industry's R&D Scoreboard and
between them accounted for more than a fifth of all private sector
expenditure on R&D in the UK.[1]
Although both companies have over 90% of their sales overseas,
much of their R&D is conducted in the UK.[2]
In 1997 SmithKline Beecham spent some £293 million, or 35%,
of their total R&D budget here:[3]
in Glaxo Wellcome almost 50%, or some £500 million, of global
R&D spend was domestic.[4]
Both employ significant numbers of scientists, clinicians and
technicians in the UK (over 4,600 are employed by Glaxo Wellcome
and just over 3,300 by SmithKline Beecham[5])
and both fund much external R&D activity. Glaxo Wellcome told
us that it currently spends "over £16 million per
year on our support for basic research in academia, most of which
is in the UK ... we provide for the training of 260 PhD students
in 56 UK universities ... over the last 10 years we have endowed
11 Professorships in British universities at an average cost of
£1 million. In addition we spend some £33 million a
year with UK universities and hospitals in the conduct of clinical
research and therapeutic trials".[6]
Similarly, SmithKline Beecham told us of "a range of collaborations,
including individual studentships, consultancy agreements, research
grants, the Shared Equipment Initiative and leading participation
in multilateral LINK schemes and Foresight Challenge Awards"
where they provide both a financial and an intellectual contribution
to the UK science base. They also provide for the training of
about 270 students (both under- and post-graduates) and spend
about £7 million per annum on research in UK universities.[7]
The sheer size and breadth of the two companies' R&D operations
leads inevitably to the conclusion that, if the merger had resulted
in even a small change in expenditure, there would have been a
ripple effect throughout the entire UK science base.
3. Both Glaxo Wellcome and SmithKline Beecham pointed
out that each was a strong company in its own right and therefore
that merger was not essential to either but that they were drawn
to consider the option because of the significant improvements
in R&D productivity and efficiency that might result.[8]
Sir Richard Sykes, Chief Executive of Glaxo Wellcome, told us
that he entered the talks with the vision of "creating
a pharmaceutical company that would be second to none in the world,
that would have the resources and the skills to put into all the
modern science and technology that we have access to today, to
produce medicines of value in the future which we could bring
to people throughout the world".[9]
Similarly, SmithKline Beecham told us that by bringing together
"two very strong companies, both acknowledged as research
leaders in their own right ... there really would be very tangible
advantages" and that the specific rationale was to generate
a much stronger research and development engine.[10]
Both were equally adamant that the merger was designed not to
enable the companies to reduce their combined R&D budgets
but, by combining the budgets and redeploying them, to make the
new company's R&D operations more efficient and competitive
than either existing company's.[11]
It had been agreed that any savings made in R&D as a result
of eradicating duplication would have been put back into R&D
operations. Both companies told us of the complementarity between
their research operations that would have meant that each could
have learnt from the other, benefited from each other's previous
investments, and used their combined expertise to develop new
products.
4. Although both companies gave us their interpretation
of why the talks failed, the precise reasons remain unclear. Admittedly,
bringing together two enormous organisations with distinct organisational
structures and many disparate parts would have been an extremely
complex process. Unlike Glaxo's acquisition of Wellcome plc in
1995, which was in effect a hostile takeover, this was to have
been a merger of equals with the new company forging its own identity
rather than adopting the image of one or other of the participants.[12]
A combined market capitalisation of around £100 billion meant
that the stakes were certainly high and, with much of that value
held as intellectual capital, the assets fragile. Sir Richard
spoke of different approaches, different cultures and different
styles of management that could not be reconciled.[13]
Mr Leschly, Chief Executive of SmithKline, told us that Glaxo
Wellcome had changed their minds on points which had already been
agreed which resulted in a loss of trust on the part of SmithKline
Beecham's board.[14]
The net result is that both companies have decided that the risks
of merger outweigh the potential benefits.[15]
5. Had the merger gone ahead on the agreed terms,
where reduced administrative overheads would have enabled more
resources to be devoted to scientific research and the overall
R&D budget maintained, both companies believe that there could
have been a beneficial effect for the whole of the UK science
base.[16] The creation
of a R&D powerhouse, able to compete across the world, and
conducting the bulk of its research in the UK would have reflected
well on the UK science base and given important signals about
the quality of its output. We share a sense of disappointment
that an opportunity to create a national champion with R&D
at its heart has been lost.
6. However, as both Sir Richard and Mr Leschly told
us it is better that both companies remain separate than that
the merger proceed without producing the desired returns.[17]
Had the merger been unsuccessful, the UK could have lost two strong
R&D companies without any tangible benefit and the contributions
which each currently make to the wider science base would have
been jeopardised.
7. We had some concerns that the failure of the merger
talks would have a negative impact on the ability of two companies
to work together on collaborative projects. However, Mr Leschly
assured us that there was no reason why the two companies should
not continue to have a good relationship and we are glad to hear
that, post-merger, a new collaborative research project is under
consideration.[18]
8. Both companies were confident that, despite the
failure of the merger talks, they would maintain and enhance their
respective positions in the global pharmaceutical industry and
would remain active supporters of the UK science base. This can
only be to its benefit.
Conclusion
9. The benefits of merging the R&D activities
were emphasised by the Chief Executives of both companies. But
twenty three days after the start of discussions those advantages
were set asidewe were told because the management styles
and philosophies of the two companies were so different as to
be irreconcilable. However, the two companies had known one another
well for many years. The Chief Executives were on such good personal
terms that Sir Richard could ring Mr Leschly in the middle of
SmithKline Beecham's negotiations with another companyAHPand,
as a result of that telephone call, those negotiations were dropped
and new negotiations between SmithKline Beecham and Glaxo Wellcome
were urgently embarked upon. If the two companies were so trusting
of one another at that point what incompatibility could have been
revealed in the subsequent twenty three days that was not apparent
at the beginning? That was not made clear.
10. There appear to be two alternative conclusions
to be drawn from the evidence before us. Either
(a) there had not been adequate initial assessment
of the potential advantages or feasibility of the merger; or
(b) the substantial advantages to be derived
from merging the two R&D programmes were as great as stated
but were abandoned because of the incompatibility of the management
of the two companies.
11. Either way the judgement of the senior executives
must be called into question. They readily embarked on an adventure
with major national assets and then equally readily abandoned
the enterprise less than a month later without a clear cause consistent
with the claimed advantages. It must be a cause for public concern
as well as concern to shareholders that neither of the Chief Executives
nor the boards of the two companies have been held publicly accountable
for this course of events, nor have adequate explanations been
forthcoming despite our inquiry.
1 SET Statistics 1997,
Office of Science and Technology, Table 4.12. Back
2 pp.
3 and 14. Back
3 p.
14. Back
4 Q.
46. Back
5 pp.
1 and 5. Back
6 p.
2. Back
7 p.
14. Back
8 QQ.
2, 3 and 58. Back
9 Q.
13. Back
10 QQ.
54. See also QQ. 55-58. Back
11 eg.
QQ. 15 and 60. Back
12 Q.
104. Back
13 QQ.
7-11. Back
14 QQ.
95-101. Back
15 QQ.
16 and 120. Back
16 QQ.
3, 4 and 66. Back
17 QQ.
6 and 120. Back
18 QQ.
121 and 124. Back
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