Examination of witnesses (Questions 100
- 119)
WEDNESDAY 22 APRIL 1998
MR JAN
LESCHLY AND
DR GEORGE
POSTE
100. That was agreed on 5 January.
(Mr Leschly) That was agreed on 30 January.
Dr Gibson
101. Was there a written agreement on it?
(Mr Leschly) That was agreed in writing. We had that,
yes. We do not have an agreement because we did not sign an agreement,
we had an understanding and in fact it was printed by Richard
himself.
Dr Williams
102. Is it your understanding then that Sir
Richard, for whatever reasons, developed or became uncomfortable
with that arrangement?
(Mr Leschly) I have to say in all due respect, Sir
Richard had an absolute right to feel uncomfortable and to change
his mind. All I am saying is the conditions under which we entered
the agreement were certainly no different from what I tried to
explain. There was a complete understanding. Also, I might add,
today, interestingly enough, the Chairman of Glaxo is located
in London and the Chief Executive Officer is located in North
Carolina.
(Dr Poste) The three days that you referred to were
not just five senior executives, it engaged the full SB Board.
Dr Gibson
103. What was Sir Richard uncomfortable with,
that you were still employed?
(Mr Leschly) You have to ask Richard about that. I
do not think that was the issue. Quite honestly the issue of senior
executives, that is important because we need to have an alignment.
That was not the reason why our Board unanimously discontinued
discussions, that was because of the whole concept of a merger
of equals, which is much more important when you are talking about
the 55,000 people in our organisation being involved. You know
that people are the assets we have, if we do not have people we
do not have all these technologies. In our case it was not a people
issue. I know there is a lot of talk about ego. What I can say
is—I think Richard will agree with me—that we had
constructive discussions about this. We certainly had our disagreements,
no doubt about it, but overall it was not a personal issue, it
had only to do with the fact that something happened that changed,
if you like, the understanding of the willingness to continue
on what had been agreed to in the deal. Therefore, what I am saying
to you is they broke the deal.
Mrs Spelman
104. You have amplified really on the memorandum
that you have already sent. The key point I take out of what you
have said is that basically they backed away from the basis of
the deal as being based on a merger of equals. Is that the key
point?
(Mr Leschly) That to me is the key point because the
merger of equals was from our standpoint the only way that we
could assure the long-term value generation. There are huge pounds
at stake here, as you know. Somebody has to deliver. It is not
a short-term gain in the stock, that does not generate anything.
It is how can we deliver medium to long-term. This is an investment
business. You can only do that if you have an alignment of management
all the way through. We are, I think Sir Richard used the words
"sensitive flowers", I could not agree more with him.
Of course, nothing to do with him or me but it is something to
do with our scientists who are very sensitive flowers. If the
very unfortunate thing should have happened that it became the
Glaxo way, or for that matter the SB way, I can assure you it
would have been very difficult for us to maintain and retain our
senior scientists whom we totally depend on and our senior executives
whom we totally depend on to manage a complex company like ours.
Dr Gibson
105. In your initial discussions though this
must have come up? You are intelligent people. You must have known
that there was going to be some kind of argument of this kind.
(Mr Leschly) Yes.
106. And yet you say it was agreed at that point
and there was a reversal.
(Mr Leschly) I told you that, before we entered into
the detailed discussions, we needed to have an understanding because
all of us have a lot of experience in this, I have been through
three mergers, I have a lot of experience, we knew exactly what
the issues were. Therefore, before entering into detailed discussions
and going public we needed to have an understanding of these issues.
We spent six days talking. As I told you, it was not easy. The
issues you are talking about were brought up, they were on the
table, it was not something that came up after ten days, 20 days.
I have to accept that it is better that Sir Richard and Glaxo
changed their minds before the merger took place than after. It
is very disappointing for all of us but it is better it happened
than if we had a marriage which then had not worked out. Then
some people would have had short-term gains but that is not what
we are after. We are after a long-term success.
Dr Kumar
107. I asked this question of Sir Richard as
well and I will ask you. Did you feel that the agreement was 80
per cent, 90 per cent—or what figure would you like to put,
was nearly there before they walked away? Would you like to put
a figure on it because I asked him and he refused to do so? Would
you like to put a figure on it?
(Mr Leschly) As you know I would certainly never do
anything that Richard would not like me to do, so all I can say
to you is we were very close. In my estimation we were very close
because we had agreed on all the fundamental issues. We had agreed
on valuation, we had agreed on all the things that I explained
to you, the roles, all of that was agreed upon before we entered
into the detailed discussion. You can put a percentage on that
but with my experience in mergers I can tell you normally when
you go public you have a chance to come through. If we had kept
the deal we probably would have been able to come through. The
deal was not kept. I have to admit there are different cultures.
I am not suggesting to you that Sir Richard is not right. There
are different styles.
Dr Jones
108. Dr Poste said that you had a close concordant
vision however.
(Mr Leschly) We did have that in science and research.
We did not necessarily have the details worked out for how to
operate the company. They are very geographically organised so
they operate in geographic areas and we work in a more divisionalised
way. I have to admit to you there were certain things that we
had not worked out. The fundamentals, the critical issues enabled
us at least to have the framework of a merger of equals to make
that happen and to my understanding, and certainly that was our
Board's view, and that is much more important, our Board and our
non-executive directors were very much in favour of this based
on these commitments. It did not work out. You can imagine the
impact on our executives and specifically our non-executive directors
who had the responsibility for this, that the trust and the confidence
had gone. Then it was very, very difficult to make a merger so
complex and with 110,000 people working. We also have a responsibility
for 55,000 people.
Dr Gibson
109. When Richard Sykes phoned you up and said
that it could not work and would never work you certainly did
not think of calling upon our Prime Minister who can sort these
things out, did you? It was so important for the nation.
(Mr Leschly) I was astonished.
110. Did you not think of another way to manoeuvre
back together again?
(Mr Leschly) We tried. Do not forget that. We tried
for four days, not only the executives, I was at a meeting together
with my Chairman, Sir Peter Walters, Sir Richard was together
with Sir Roger Hurn. The four of us met. After we had had this
very surprising meeting we tried to come back but the answer was
it would not work, it would never work under the deal we had made.
We were not prepared—that should be very clear, we do not
need a merger, we are a very strong company—to have a takeover
without approval, absolutely not. That is not in the interest
of our shareholders and it is certainly not in the interest of
our 55,000 people, believe me.
Dr Jones
111. Sir Richard told us that no personality
clashes were involved and it was never one-to-one between himself
and yourself; it was always groups of people. Is that your view
of the situation?
(Mr Leschly) You can imagine that I had a very good
relationship with Richard and I expect to have a very good relationship
with Richard in the future. It was a very tough meeting on 20
February, as you can imagine. The message we got "it will
not work, it will never work" that hurt a little bit but
that is behind us now.
112. A little while ago you very pointedly I
thought said that it had been agreed that the vision was a health
care products and services company.
(Mr Leschly) Yes.
113. Was there any disagreement subsequently
on that vision?
(Mr Leschly) That was agreed because when one day
we would announce the merger of the two companies it was very
important that there were no mixed signals. Glaxo have successfully
had a very clear strategy focusing on pharmaceuticals, to be successful
in pharmaceuticals, and they have certainly accomplished that.
We have a very different heritage. Beecham, as you all remember,
was very much a consumer health care company. It started off in
antibiotics, became a major force in antibiotics, was not really
what I consider a fully-fledged strong pharmaceutical company.
SmithKline Beecham is a very different animal. We have now restructured
the company so it is a health care products and services company
realising that the focus is on pharmaceuticals. That is a different
strategy. We are involved in molecular diagnostics, we are involved
in building a health care services group, we are involved in what
is called pharmacy management, etc., relating to disease management.
We are a slightly different company than Glaxo. We are very successful
with that strategy. If you suddenly sit together at the table
and say "what is the future strategy", it should not
be SB strategy, it should not be Glaxo strategy, what is needed
to compete in our environment in the future. I am sure you are
all aware there are so many changes and with molecular diagnostics
and with patient profiling, with the ability to identify responders
and non-responders, it is going to have a major role in how you
select drugs in the future. This country cannot survive the bills
of the NHS without getting into disease management, identifying
higher cost, high risk patients, how to intervene, how to measure
outcome. We are in that business. When Richard and I sat with
our management team and said "What is the agreement here?
Is it just pharmaceuticals and therefore we have to get rid of
all the rest or is it this?", if it had been the first we
would not even have been talking. We did agree that it would be
a health care products and services company. Did Richard Sykes
change his mind in the 20 days? He did not tell me.
114. I notice in your submission you say that
you are a highly attractive partner for collaboration, your company,
and you are also an attractive partner for services beyond pharmaceuticals.
(Mr Leschly) Yes.
115. Is that the difference between your company
and Sir Richard's?
(Mr Leschly) It is a difference but a difference that
we could easily work out if we had an aligned management in a
merger of equals. Our concern was naturally, Chairman, that if
there had been a takeover based on what was proposed at that famous
meeting of 20 February I can assure you it would not have been
a strategy that we had agreed to. In a takeover who is in the
driver's seat? That is the person who takes over.
116. You also somewhat disparagingly comment
in your submission: "we are not another Wellcome". What
do you mean by that?
(Mr Leschly) That is true. The Wellcome situation
was obviously a hostile takeover. In a hostile takeover you pay
a premium and to pay back that premium you obviously need to do
certain things that you do not have to do when you do not exchange
cash in a merger of equals. I have to accept that they have been
very successful in the Glaxo Wellcome merger, it has worked out,
but there is no doubt who has been in the driver's seat.
Mr Beard
117. Both you and Sir Richard previously have
been very frank in describing what went on. At the heart of this
inquiry is a contradiction that I still do not feel is resolved
after so much evidence. On the one hand one could interpret the
outcome of events as saying: "there were great expectations
but when we went into them in more detail they melted away, they
were insubstantial, therefore we called it off". That is
not what either of you have been saying. Essentially both of you
have said, and you said quite clearly this afternoon, there were
very, very substantial benefits, benefits of scale, benefits of
complementarity and those are all there and you are still claiming
them. On the other hand, you have just been outlining the reasons
why it was called off. I have to say that compared with the benefits
which have been described the reasons for calling it off look
rather trivial, they seem somewhat out of balance, they are out
of proportion compared with the outline of the benefits that you
gave earlier. I wonder if you would like to comment on that. Again,
going back to the point I raised when we were talking earlier,
you are in charge, along with Sir Richard, of a very large proportion
of a major national asset. If somebody is looking in and they
suddenly hear this story as it is unfolding how would you answer
them when they say: "is this national asset safe in their
hands"?
(Mr Leschly) I understand what you are saying and
I would like to refer that question of the national asset related
to the research base, the administration of its enormous funds,
developing drugs and maybe, George, you will respond to that,
please.
(Dr Poste) There may be a subtlety that I am missing
and if so I apologise but I think it is in part what I responded
to earlier. Both of the companies engaged in this debate have
prestigious records of accomplishment in research and development
which accounts for the international acknowledgement of the UK
as being a leader in pharmaceuticals. There would indeed be tangible
advantages that you emphasised, and we acknowledge, as Glaxo Wellcome,
to bringing the two organisations together, but again under the
circumstances of a merger because R&D does not exist in isolation,
R&D is part of the totality. If you have a situation where
you are not dealing with a merger of equals, where as Mr Leschly
has pointed out it is not the SB way or the Glaxo way, you are
genuinely trying to shape a genuine new culture.
Dr Jones
118. A third way.
(Dr Poste) By contrast, if you are ending up for all
intents and purposes in a hostile acquisition—notwithstanding
the fiduciary responsibility we have to our shareholders to ensure
that a premium is paid—the internal cultural environment
that has been seen time and time again, whether it be in the pharmaceutical
industry or not, following an acquisition, the dominant party,
ie the acquirer, is able to impose the overall framework of its
culture and it is quite appropriate, since they paid the acquiring
price, to do that. I would argue that under those circumstances
a genuine scientific asset of this nation would be irreparably
damaged.
Dr Williams
119. Is there a way of reviving the merger talks?
We did ask Sir Richard Sykes and he pointed out that there was
not any Stock Exchange prohibition on further talks or what have
you and I think it is very disappointing what happened at the
final stage, a very advanced stage anyway, and maybe the differences
were not that deep. Maybe there is a way of reconciling whatever
went on that weekend towards the end of the talks.
(Mr Leschly) I think the short answer I can give you,
Dr Williams, is theoretically we could go back but I do not see
a possibility of merging the two companies. As I said before,
our Board, and that is the important thing, our Board and our
management—and it is not just two or three people, management
goes deep here—have lost trust and confidence in our ability
to work together with the management in Glaxo and that is essential
for this. You can say that is not a reason but I have to tell
you that is a very, very important reason for bringing this together.
Without that trust and confidence we cannot generate the value,
it will destroy value, believe me it will destroy value. Are you
aware on this Committee, by the way, that 70 to 80 per cent of
all mergers do not generate value?
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