GlaxoSmithKline (GSK) is a UK based firm and is second largest pharmaceutical and healthcare company in the world. GSK is listed on both New York Stock Exchange and London Stock Exchange. GSK is one of the leaders in pharmaceutical industry with seven percent worldwide share and is the only company that researches both medicines and vaccines for World Health Organizations three priority diseases namely HIV, tuberculosis and malaria. It has an employee base of one hundred thousand people and has operations in 37 countries with 80 manufacturing sites. Each year the company contributes four billion packs of medicines and healthcare products. GSK spends 8 million (US14 million) on research and development each day thats around 300,000 (US562,000) every hour. In 2007 the turnover decreased from 23.2 in 2006 to 22.7 . This was a very tough year for GSK as there was a severe decline in the sales of Avandia which is the companys second largest product.
Glaxo Wellcome
Glaxo was founded in New Zealand by Joseph Nathan in 1873. Before merging and become GSK, Glaxo was familiar with mergers as in 1995 Glaxo took over from Wellcome for 9bn to become Glaxo Wellcome. At that time this was the biggest merger in UK history.
Wellcome Foundation was established in 1936 and was financing medical research. It owned a 40 stake in Zantac. Glaxo struggled to find a replacement for its main drug whose patent has expired in the US and meanwhile Wellcomes antiherpes drug, Ziovirax, had already become available without a prescription. Wellcome has rejected this 14 billion unsolicited takeover offer before this.
SmithKline Beecham
The merger story was no different with SmithKline Beecham as SmithKline Beckman and Beecham has already merged in late 1980. SmithKline Beckman itself was the result of the 1982 merger of SmithKline (originally Smith, Kline French) and Beckman Instruments. This merger is categorized as Merger of Equal because both companies had equal capitalization of 3.5 billion.
SmithKline despite an aggressive and experienced sales force in the US was unable to restore the income from its core drug, Tagamet. Beecham was a consumer goods Company which attained success in its early research attempt on antibiotics, but had no competencies to become a major pharmaceutical player. This merger was inevitable and the merged resulting organization emerged with an international marketing presence. Glaxos acquisition of Wellcome produced only short-term savings but no long-term growth.
The Merger
In January 2000, Glaxo Wellcome and SmithKline Beecham announced their 75.961billion proposed merger which was approved by shareholder majority of 99 percent. This merger was expected to give GSK a global market share of 7.3 percent with an research and development budget of 4 billion. Sir Richard Sykes became the non-executive chairman, while Jean Paul Garnier became the CEO of the GlaxoSmithKline under the new corporate governance structure. Theoretically it was a horizontal merger.
In the first sentence of their famous book on merger Bauman et al. (1997) stated, When individuals seek personal change in pursuit of a higher goal, it often means they must change a particular mindset, learn from others about how they succeeded, or acquire some new skills. Many argue that mergers and acquisitions activities are as a result of the economic environment and apparently it seems that GSK merger was part of the pharmaceutical merger wave, but keeping in view future prospects and growing market potential pharmaceutical firms started looking for partners, because the growing trend in the industry could affect their future cost. RD investment was on the up with increasing proportion to sales from 20 billions in 1990s to 35 billion in 1999. Similarly huge capital expenditures like RD especially in genetic medicine have along and uncertain payback and firm believed that only large size firms can do so. Another reason was patent expiration as patent expiry can reduce innovator sale up to 80 percent, hence it was argued that merging research laboratories and product pipelines would result into added knowledge from which potential blockbuster drug could emerge (Heracleous and Murray 2001). CEOs of both companies declared that merger will improve the two groups ability to generate sustainable long-term growth and is expected to enhance shareholder value in an increasingly competitive environment. They also added that the deal will also result into a substantial operational cost savings (GlaxoSmithKline, 2000). Similarly drug companies also needed marketing muscle to sell their medicines.
Terms and Conditions of the Merger
Copeland et al. (2004) stated that the mode of payment for the target company shares may be either cash, stock or hybrid securities, however Martin (1996) found that firm with higher growth opportunities prefer stock as a mode of acquisition. Keeping in view the underlying growth, GlaxoSmithKline plc acquired the whole of the issued share capital of Glaxo Wellcome plc and SmithKline Beecham plc in exchange for shares in GlaxoSmithKline plc. Under this arrangement shareholders of Glaxo Wellcome plc and SmithKline Beecham plc received shares in GlaxoSmithKline plc as follows
For each Glaxo Wellcome share 1 GlaxoSmithKline share
For each SmithKline Beecham share- 0.4552 GlaxoSmithKline Shares
In the case of shares held as American Depository Shares (ADSs) evidenced by American Depository Receipts (ADRs), each Glaxo Wellcome ADS represented two Glaxo Wellcome shares, each SmithKline Beecham ADS represented five SmithKline Beecham shares and each GlaxoSmithKline ADS now represents two GlaxoSmithKline shares. Accordingly holders of Glaxo Wellcome ADRs and holders of SmithKline Beecham ADRs receive
for each Glaxo Wellcome ADS 1 GlaxoSmithKline ADS
for each SmithKline Beecham ADS 1.138 GlaxoSmithKline ADSs
On the merger date GlaxoSmithKline plc issued 6,222,462,894 ordinary shares of 25p each at par to acquire 3,653,435,656 ordinary shares of 25p each of Glaxo Wellcome plc and 5,643,732,950 ordinary shares of 6.25p each of SmithKline Beecham plc. The nominal value of the shares issued was 1,556 million and the market value of the shares at that date was 119 billion. (Annual report, 2000).
Financial Analysis
NPV, the simplest method of valuation is used. Under the NPV approach the present value of both firms is calculated individually before merger and it is compared with the present value of combined entity after merger. If the gain is positive the economic justification for merger exist (Myers et al, 2006)
GAIN PV of GSK - (PV of GW PV of SK)
PV of GSK 85,000,000,000 (1.05)3 66,599,701,000
GSK market capitalization for the year of 2003 is 85 billion.
PV of GW Glaxo Wellcome Share price month before merger (Quoted Price) Number
of Glaxo Wellcomes shares on December 27, 2000
17.5 3,653,435,656
63,935,123,980
PV of SK SmithKline Share Price month before merger (Quoted Price) Number of
SmithKline shares on December 27, 2000
7.9 5,643,732,950
44,585,490,305
COST Percentage of ownership acquired in SmithKline of total new common
stocks PV of GSK PV of SK 41.2566,599,701,000 - 44,585,490,305
- 17,113,113,643 GBP
GAIN PVof GSK - (PV of GW PV of SK) - 41,920,913,285 GBP
NPV GAIN COST
- 41,920,913,285 (- 17,113,113,643)
- 24,807,799,642 GBP
Even at the time of merger many analyst citizen the future prospects of Glaxo SmithKline merger as (Barrons, 2000) called this merger as a marriage of convenience with lots of tough issues to be worked out SmithKline is wedding itself to a slow-moving company with a lacklustre pipeline of new drugs coming to market. After two and half years cost savings had in fact amounted to 1.8 billion by 2003 and cost reductions had taken GSK trading profit margin to 35 per cent. GSK under-performed at the FTSE All-Share Index, and with the comparison from pre acquisition stock the company is not doing well.
The remuneration scheme for the CEO came under fire and the shareholders voted against it because they were not happy as most pharmaceuticals linked their CEOs pay to share-price movements they considered that short-term stock price performance was a poor reflection of management quality and ultimately. At the end of 2003, the share price was trading just above 13 per share while, at the same time, many employees were demoralized as they had found the remuneration debacle terrible.
Recent research on this mega pharmaceutical merger shows that they havent really delivered value. The stock prices under perform both in absolute and relative terms against the index. Additionally previously executive remunerations were based on stock performance, which was supporting short term-ism on the part of management. As opposed to that the company has substantially reduced the cost 1.8 a year, by of combining their RD operations, manufacturing consolidation and substantial headcount reduction. Anyhow the debate of value creation in future is still questionable.
Glaxo Wellcome
Glaxo was founded in New Zealand by Joseph Nathan in 1873. Before merging and become GSK, Glaxo was familiar with mergers as in 1995 Glaxo took over from Wellcome for 9bn to become Glaxo Wellcome. At that time this was the biggest merger in UK history.
Wellcome Foundation was established in 1936 and was financing medical research. It owned a 40 stake in Zantac. Glaxo struggled to find a replacement for its main drug whose patent has expired in the US and meanwhile Wellcomes antiherpes drug, Ziovirax, had already become available without a prescription. Wellcome has rejected this 14 billion unsolicited takeover offer before this.
SmithKline Beecham
The merger story was no different with SmithKline Beecham as SmithKline Beckman and Beecham has already merged in late 1980. SmithKline Beckman itself was the result of the 1982 merger of SmithKline (originally Smith, Kline French) and Beckman Instruments. This merger is categorized as Merger of Equal because both companies had equal capitalization of 3.5 billion.
SmithKline despite an aggressive and experienced sales force in the US was unable to restore the income from its core drug, Tagamet. Beecham was a consumer goods Company which attained success in its early research attempt on antibiotics, but had no competencies to become a major pharmaceutical player. This merger was inevitable and the merged resulting organization emerged with an international marketing presence. Glaxos acquisition of Wellcome produced only short-term savings but no long-term growth.
The Merger
In January 2000, Glaxo Wellcome and SmithKline Beecham announced their 75.961billion proposed merger which was approved by shareholder majority of 99 percent. This merger was expected to give GSK a global market share of 7.3 percent with an research and development budget of 4 billion. Sir Richard Sykes became the non-executive chairman, while Jean Paul Garnier became the CEO of the GlaxoSmithKline under the new corporate governance structure. Theoretically it was a horizontal merger.
In the first sentence of their famous book on merger Bauman et al. (1997) stated, When individuals seek personal change in pursuit of a higher goal, it often means they must change a particular mindset, learn from others about how they succeeded, or acquire some new skills. Many argue that mergers and acquisitions activities are as a result of the economic environment and apparently it seems that GSK merger was part of the pharmaceutical merger wave, but keeping in view future prospects and growing market potential pharmaceutical firms started looking for partners, because the growing trend in the industry could affect their future cost. RD investment was on the up with increasing proportion to sales from 20 billions in 1990s to 35 billion in 1999. Similarly huge capital expenditures like RD especially in genetic medicine have along and uncertain payback and firm believed that only large size firms can do so. Another reason was patent expiration as patent expiry can reduce innovator sale up to 80 percent, hence it was argued that merging research laboratories and product pipelines would result into added knowledge from which potential blockbuster drug could emerge (Heracleous and Murray 2001). CEOs of both companies declared that merger will improve the two groups ability to generate sustainable long-term growth and is expected to enhance shareholder value in an increasingly competitive environment. They also added that the deal will also result into a substantial operational cost savings (GlaxoSmithKline, 2000). Similarly drug companies also needed marketing muscle to sell their medicines.
Terms and Conditions of the Merger
Copeland et al. (2004) stated that the mode of payment for the target company shares may be either cash, stock or hybrid securities, however Martin (1996) found that firm with higher growth opportunities prefer stock as a mode of acquisition. Keeping in view the underlying growth, GlaxoSmithKline plc acquired the whole of the issued share capital of Glaxo Wellcome plc and SmithKline Beecham plc in exchange for shares in GlaxoSmithKline plc. Under this arrangement shareholders of Glaxo Wellcome plc and SmithKline Beecham plc received shares in GlaxoSmithKline plc as follows
For each Glaxo Wellcome share 1 GlaxoSmithKline share
For each SmithKline Beecham share- 0.4552 GlaxoSmithKline Shares
In the case of shares held as American Depository Shares (ADSs) evidenced by American Depository Receipts (ADRs), each Glaxo Wellcome ADS represented two Glaxo Wellcome shares, each SmithKline Beecham ADS represented five SmithKline Beecham shares and each GlaxoSmithKline ADS now represents two GlaxoSmithKline shares. Accordingly holders of Glaxo Wellcome ADRs and holders of SmithKline Beecham ADRs receive
for each Glaxo Wellcome ADS 1 GlaxoSmithKline ADS
for each SmithKline Beecham ADS 1.138 GlaxoSmithKline ADSs
On the merger date GlaxoSmithKline plc issued 6,222,462,894 ordinary shares of 25p each at par to acquire 3,653,435,656 ordinary shares of 25p each of Glaxo Wellcome plc and 5,643,732,950 ordinary shares of 6.25p each of SmithKline Beecham plc. The nominal value of the shares issued was 1,556 million and the market value of the shares at that date was 119 billion. (Annual report, 2000).
Financial Analysis
NPV, the simplest method of valuation is used. Under the NPV approach the present value of both firms is calculated individually before merger and it is compared with the present value of combined entity after merger. If the gain is positive the economic justification for merger exist (Myers et al, 2006)
GAIN PV of GSK - (PV of GW PV of SK)
PV of GSK 85,000,000,000 (1.05)3 66,599,701,000
GSK market capitalization for the year of 2003 is 85 billion.
PV of GW Glaxo Wellcome Share price month before merger (Quoted Price) Number
of Glaxo Wellcomes shares on December 27, 2000
17.5 3,653,435,656
63,935,123,980
PV of SK SmithKline Share Price month before merger (Quoted Price) Number of
SmithKline shares on December 27, 2000
7.9 5,643,732,950
44,585,490,305
COST Percentage of ownership acquired in SmithKline of total new common
stocks PV of GSK PV of SK 41.2566,599,701,000 - 44,585,490,305
- 17,113,113,643 GBP
GAIN PVof GSK - (PV of GW PV of SK) - 41,920,913,285 GBP
NPV GAIN COST
- 41,920,913,285 (- 17,113,113,643)
- 24,807,799,642 GBP
Even at the time of merger many analyst citizen the future prospects of Glaxo SmithKline merger as (Barrons, 2000) called this merger as a marriage of convenience with lots of tough issues to be worked out SmithKline is wedding itself to a slow-moving company with a lacklustre pipeline of new drugs coming to market. After two and half years cost savings had in fact amounted to 1.8 billion by 2003 and cost reductions had taken GSK trading profit margin to 35 per cent. GSK under-performed at the FTSE All-Share Index, and with the comparison from pre acquisition stock the company is not doing well.
The remuneration scheme for the CEO came under fire and the shareholders voted against it because they were not happy as most pharmaceuticals linked their CEOs pay to share-price movements they considered that short-term stock price performance was a poor reflection of management quality and ultimately. At the end of 2003, the share price was trading just above 13 per share while, at the same time, many employees were demoralized as they had found the remuneration debacle terrible.
Recent research on this mega pharmaceutical merger shows that they havent really delivered value. The stock prices under perform both in absolute and relative terms against the index. Additionally previously executive remunerations were based on stock performance, which was supporting short term-ism on the part of management. As opposed to that the company has substantially reduced the cost 1.8 a year, by of combining their RD operations, manufacturing consolidation and substantial headcount reduction. Anyhow the debate of value creation in future is still questionable.
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