Examination of witnesses (Questions 80
- 99)
WEDNESDAY 22 APRIL 1998
MR JAN
LESCHLY AND
DR GEORGE
POSTE
80. To what extent would the merger of equals
have been in the R&D activities, the overlap of research work
that is going on between the two companies? What is the extent
of the overlap activities and would it have had an influence on
the workforce? Would the R&D have increased, decreased? How
much was this part of the discussion? Did that produce the outcome
that it has?
(Mr Leschly) If I can start and then Dr Poste will
continue. When we had discussions with Glaxo there was absolutely
total agreement about the vision we had for how to run our research
and development. This was not an issue of cost cutting at all.
There is no doubt that there was an overlap of activities in certain
areas.
81. In what respect?
(Mr Leschly) There were overlaps in certain activities,
Dr Poste can explain which ones. The clear understanding we had
as part of the agreement we had even before we entered into detailed
discussions was that if we had savings because of overlap they
would be re-invested into the R&D in general. The whole idea
was to enhance the productivity of R & D.
(Dr Poste) With regard to overlap, one of the very
pleasing aspects that did indeed make elements of this attractive
was the low level of overlap. Glaxo Wellcome is a first class
leading global corporation, they have got absolutely superb science,
but it is very fortuitous actually how minimal the scientific
overlap is. There are certain companies you could identify with
a greater overlap with what SB does but in the case of Glaxo Wellcome
there was a very pleasing lack of overlap. Certain technologies,
which we have already spoken of, are similar and both companies
have to make the same investment. We use the same gene sequencing
machines and have people with similar skills but genomics is such
a vast project in its own right that it is not really something
where you actually have to say "we have got two people and
we only need one". It was actually a very pleasing scenario
that would have been a relatively straight forward integration
which, coming back to the important point that was made earlier,
minimises the time of disruption. Inevitably when you bring organisations
together that have not worked together there is some period of
uncertainty and people are finding their place. When you can actually
say right up front that this is a new enterprise which is going
to pursue everything it was doing before and grow, that has an
enormous stabilising effect on the scientific community.
82. You say "minimal", would "minimal"
be four per cent, five per cent, ten per cent? Can you put a figure
on it?
(Dr Poste) It is difficult because clearly as Sir
Richard said when he was here R&D is always geared to a percentage
of sales and both companies have got very strong sales and, as
you know, this industry invests more as a per cent of its sales
back into R&D than any other sector. We run SB at approximately
16 per cent of our sales and I think, although I am not sure,
Glaxo is roughly comparable. One would anticipate that would be
the level for the new company and since both companies have had
a strong heritage of growing R&D one would logically assume
that would continue, providing that the sales line increased in
proportion.
83. What about the workforce itself? Would it
remain the same?
(Dr Poste) It would have remained the same initially
but once again if you create a company which is a world leader
commercially which is already illustrating its commitment to R&D
as the driving force, I think you can confidently take it there
will be continuing expansion of R&D.
84. Expansion, not a decrease?
(Dr Poste) Expansion.
Dr Jones
85. On the question of workforce, you were saying
earlier that after the merger between SmithKline French and Beecham
you had just over 2,000 staff and you have now got 3,349 but over
1,000 of those are described as "consultants and temporary
staff" from agencies, which has been a major change. Could
you run us through the reasons for that?
(Dr Poste) This is a new category of individuals,
much of it is computing where the very nature of the people in
the computing industry is that they often move across different
industrial sectors. We made a decision that wherever we could
get better services from the outside without having to make very
large capital investments in it we would. I think in IT you will
find in many companies it is now often purchased from large enterprises
on the outside. These are permanent contract employees of SB but
they actually are linked to other external agencies.
(Mr Leschly) I can give you several other examples:
the cafeteria personnel, the security personnel.
86. Research and development?
(Mr Leschly) The total amount you are talking about,
the 3,000 people, includes everybody in the research centre.
87. So it does include that?
(Mr Leschly) Sure.
88. It would be interesting to have a breakdown
of that and a breakdown between the consultants who are employed
and temporary staff.
(Mr Leschly) We can certainly give you more information
about that.
89. Is this a phenomenon that is going on in
other parts of the industry and that is likely to increase? There
is a big demand for people skilled in bio-informatics.
(Mr Leschly) I think as a general strategy we need
to focus our efforts on where we have our core capabilities. It
is very important that we focus our resources on that and then
where we can outsource and see that other people can do a better
job than us why would we not allow them to do that so we can focus
on what we are really good at, namely the core research and development
and we cannot outsource that. There are certain aspects of what
takes place in a huge research centre as we have just invested
in in Harlow, where we just invested a quarter of a billion pounds
where we obviously can outsource and we do that.
(Dr Poste) That trend is not only as you ask, Dr Jones,
with regard to the industry at large but certainly we see that
reflected in our US centre at the same time. You mentioned bio-informatics;
even though SB is probably one of the largest bio-informatics
groups in the world, many of whom are here in the United Kingdom,
we are in a setting where certain specialist skills are very difficult
to come by and that of course also drives this whole issue of
alliances with small companies set up for very specialist entrepreneurial
activities. A recent study in the publication "In Vivo"
which monitors this shows that over the last five years SB has
forged more such alliances than any other company in order to
access those types of skills on the outside.
90. This growth that you have explained was
expected to take place, was that likely to be directly employed
or was it likely to be consultants of this nature that you are
talking about?
(Mr Leschly) I do not know the exact mix of that but
I think we will continue to have a certain mix. The majority I
believe will be full-time employed by SmithKline Beecham.
91. You spoke very well of the productivity
of your staff in the UK and I note that 35 per cent of your R&D
expenditure is in this country.
(Mr Leschly) Yes.
92. And 50 per cent of Glaxo's. Have you got
any plans to perhaps increase the proportion of your research
and development that is spent here, assuming we get our act together
in relation to our basic science?
(Mr Leschly) I can tell you that we are committed
to the success of the science base here in the United Kingdom.
We will be more than delighted to work with you and the Government
to enhance the tradition here in scientific excellence. If that
continues here we do not see any reason why we should not expand
here. If that would be at the cost of what we expect somewhere
else we would have to look at that and we will certainly do it
if it makes sense.
Dr Jones: Thank you very much. We now want to
move on to discuss the termination of the merger talks and I would
like to hand over to Dr Williams.
Dr Williams
93. I have quite enjoyed the comments so far
and I was persuaded anyway that two strong companies, both British
based, creating this extremely strong asset was broadly a very
good idea and I felt disappointed, like many people on the Stock
Exchange, and a lot of people felt very disappointed that this
did not come about. Why did the talks collapse?
(Mr Leschly) Let me tell you what happened and I hope
that you will give me a little time and be a little patient with
me because I would like to tell you exactly what happened. Let
me go back. As I mentioned before we had preliminary discussions
with American Home Products. This was in early January. The discussions
unfortunately leaked. That was very unfortunate. With the leak
our stock price went up ten per cent within four days. The panel
requested that if it was true, we announce it, so we announced
it. Then on 24 January I got a telephone call from Sir Richard
Sykes and I definitely remember the telephone call. Richard I
have known for 15 years, I get along with him extremely well.
Richard said: "Jan, is it too late?" and I said "it
is not too late".
The Committee suspended from 4.49 p.m. to 4.59
p.m. for a division in the House.
Dr Jones
94. Shall we begin?
(Mr Leschly) Dr Williams, you asked a very important
question, why did the merger fail.
Dr Williams
95. You were on the telephone call of 24 January.
(Mr Leschly) I got a telephone call. I want to remind
you it was Glaxo who called us. Richard said: "Jan, is it
too late?" In that first conversation which was on 24 January
I remember clearly saying to Richard: "Richard, before we
get into detailed discussions we need to have an understanding
of how we can make sure that a merger of this magnitude can come
through?" He agreed with that. Therefore, between 24 and
30 January, six days, we had intense discussions consisting of
senior management from both Glaxo and ourselves. I was represented
together with JP Garnier, our President, and there was Richard
Sykes, their CEO, Bob Ingram and John Coombe. The five of us spent
basically six days in New York, in London, talking, trying to
come to grips with how could this merger and the fundamental principles
of this merger take place. We discussed, as you can imagine, the
valuation, that was one part of it. The other part was how could
this work. We had the vision discussion and we agreed too, very
importantly, that this would be a health care products and services
company. I cannot go into all the details here but we also agreed,
as you can imagine, how to select the best people, not if it was
Glaxo or SB but on merit, very importantly. We agreed on the best
practices, how you manage the company. You have to appreciate
the very different cultures between our two companies. We have
very different styles. We have a much more centralised organisation,
if you like, they are much more decentralised. We had to come
to grips with how could this work. We also agreed on the roles
of the senior executives, including Richard's role, my role, and
other senior executives. We agreed on the Board composition. We
agreed on the management committee, equal participation from the
two companies. There was to be something called the Merger Integration
Commmittee which basically would manage the company in the first
year or two co-chaired by Richard and me, equal participation.
There was the Pharmaceutical Review Board chaired by Richard,
and properly so. The Pharmaceutical Review Board is a committee
which decides on resource allocations and prioritisation of our
research and development. All of that in a six day period. I am
not telling you these were easy discussions. It was basically
very little sleep in six days. We came to a deal. With my management
team I then presented that deal to our Board and I certainly believed
that Sir Richard, being Chairman of the Board, went to his Board
and got approval for this deal. Our Board decided—after
having reviewed that very carefully versus the alternatives we
were looking at—that it was in our company's interest to
enter into detailed discussions with Glaxo. At the same time we
immediately discontinued discussions with American Home Products.
That was announced on 30 January and you saw the announcement.
There was limited information in the announcement because of sensitivities
to the aspect, as you can imagine. After 30 January, we now entered
into detailed discussions based on an understanding of how this
could work as a merger vehicle, and approved by our Boards, we
now entered into a point called due diligence where the teams
worked for the next three weeks on due diligence issues, synergies,
regulatory issues, you name it. There were lots of people involved.
To the best of my knowledge these discussions went well. I am
sure there were problems here and there but overall no major disruption,
no major hiccoughs of any type. This leads up to 20 February when
on Glaxo's initiative, Richard's initiative, he asked for a meeting.
The five of us met in New York and Richard said, not only to my
surprise but I have to say to my astonishment, that what we had
agreed and was a condition for entering into these discussions
"would not work and would never work" and therefore
suggested and proposed a major change in what we considered a
deal, an understanding of how this would work, a major change.
These changes included major changes in senior executives' roles,
including my role. More importantly they included a change in
what we considered a merger of equals. A merger of equals means
that it is not a matter of the Glaxo way or the SB way, it is
the best way for the new company. That agreement of a merger of
equals in our view had turned into a takeover without a premium.
A takeover without a premium meaning that it would not be the
best practices, it would not be the best people selected on merit,
it would be the Glaxo way and not a new way. We walked out of
that meeting. I have to say to you I did not get any explanation
and still to this day do not have an explanation of what happened
within Glaxo in that 20 day period. It certainly had not occurred
to us, it was a complete surprise. JP and I went back to our Board.
We then worked for four days in sessions with our Board trying
to negotiate and revive the deal on the original conditions that
we had negotiated. Those were sessions, specific sessions excluding
executives like me, with just the non-executive directors working
with non-executive directors from Glaxo to see if we could revive
it. The sad thing is Glaxo broke the deal and Glaxo, therefore,
in our view destroyed our Board's trust and confidence in their
intentions.
96. At that stage could I intervene and ask
a second question? I am glad you have put so much on the record
there in such candid detail.
(Mr Leschly) I think it is about time.
97. In very summarised form, what Sir Richard
told us, if I can quote back to you: he said that the merger talks
were terminated because it became apparent that there were irreconcilable
differences in approach, vision and management structure between
the two companies. I think broadly that reflects what he said.
(Mr Leschly) Yes.
98. Specifically on management structure you
referred to a change in definition of your own role.
(Mr Leschly) Yes.
99. These three days of meetings with just the
five most senior people, was it part of the problem that you were
US based? I am quoting now not from any briefing but from the
newspapers at the time. In the merged company you saw your own
future, and that of Mr Garnier, as being based in Philadelphia
in the United States whereas Glaxo really saw the future being
British-based?
(Mr Leschly) As I said to you, I cannot speak on behalf
of Sir Richard or the Board of Glaxo or the management on why
they changed their mind, why they walked away from what we had
agreed to. In the discussions we had, in fact the discussions
we had and the understanding we had, the deal we had before we
entered into the detailed discussions, we did have this discussion,
it was very clearly outlined that Richard would be Chairman located
in London, I would be CEO located in Philadelphia, where we are
today.
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