Warner-Lambert Co. yesterday rejected an $80 billion takeover bid from pharmaceutical giant Pfizer Inc., contending that its recently agreed-upon merger with American Home Products Corp. would be a better deal for its shareholders.
The rejection sets the stage for a major battle for control of Warner-Lambert, itself a major pharmaceutical company and owner of Lipitor, an anti-cholesterol treatment that is on track to become one of the best-selling drugs in the world.
The outcome also will have important consequences for American Home, which has been in search of a merger partner for more than a year.
Size is becoming increasingly important as drugmakers struggle to find new ways to compete in the highly fragmented global market. Not only American Home but other medium-sized players are now, or soon will be, seeking alliances that can give them additional research capabilities and economies of scale.
Pfizer on Thursday offered 2 1/2 of its shares for each Warner-Lambert share, or about $93 a share. However, a late-day slump in Pfizer's stock cut the value to as low as $87 by some calculations. The American Home deal has been valued at about $82 a share, and analysts said they expected Pfizer to sweeten its offer.
Several analysts said Warner-Lambert's management would clearly prefer the American Home merger because of what one called a "generational fit," with Warner's chairman in line to run the merged company in the near future. Under Pfizer, whose market value of $144 billion is roughly equal to Warner and American Home combined, Warner-Lambert would essentially be "swallowed up," another analyst said.
Much of the battle is expected to take place in the courts.
Under terms of the merger agreement, Warner-Lambert would have to pay a $2 billion "break-up fee" to American Home if it backs out. Pfizer has already filed suit challenging the legality of that fee along with a "lockup option" that gives American Home the right to buy 10 percent of Warner's stock.
In addition, several Warner-Lambert shareholders filed suit Thursday to block the merger with American Home, contending that Warner's board has a legal obligation to get the best price it can for shareholders.
Warner's board yesterday argued that the American Home deal is in the best interests of shareholders. In a statement, the board noted that the deal was reached after more than a year of reviewing strategic options and several months of negotiations with American Home.
American Home Chairman John R. Stafford said yesterday that his company plans to complete the merger with Warner. "We will deliver more value to Warner-Lambert shareholders than they can get from Pfizer's unsolicited offer," he said. Stafford called Pfizer's offer "illusory and not capable of being completed."
Warner-Lambert has had a marketing agreement with Pfizer for Lipitor that allows the larger company to share revenue from the drug in exchange for applying its marketing muscle to maximize sales. The drug has been so successful, however, that Pfizer is required to give something back to Warner to equalize the deal.
Several analysts said that while the litigation is going on it is not clear whether or how Pfizer might be able to take its case directly to the Warner shareholders.
Pharmaceutical analyst Brian Stansky of T. Rowe Price Associates Inc. in Baltimore said, "I think the Warner shareholder comes out ahead no matter what," but that investors need to know the exact terms of the Lipitor marketing agreement to assess the competing deals.
"My guess is that Lipitor is at least 70 percent of the story," Stansky said. "We need some more information here."
Warner-Lambert's stock has shot up to almost $90 a share in the past two days, while American Home's has slipped, suggesting that Wall Street is betting that Pfizer will win. However, Pfizer's own stock was hit hard yesterday, closing at $34.75 a share, down $2.50, as investors apparently feared that it might be drawn into a costly bidding war, or that its aggressive pursuit of Warner suggested problems in its own pharmaceutical pipeline.