Consumer products giant Procter & Gamble Co. yesterday abruptly dropped talks to buy two of the world's largest pharmaceutical makers after news of the potential mega-merger sent Procter & Gamble's shares tumbling.
The company had planned to use stock to pay for Warner-Lambert Co. and American Home Products Corp., but the meltdown in its stock price greatly diminished its purchasing power.
The deal "could have been a blockbuster combination," Procter & Gamble's plainly frustrated chief executive, Durk I. Jager, said in a statement.
"Now, however, we have concluded that leaks and resulting speculation on a possible transaction have created an environment in which we cannot continue meaningful discussions," Jager said.
Though talks had been underway for three weeks, Procter & Gamble's first public comment on the matter was to call it off in an apparent effort to stop the stock from sliding. That was just days after Procter & Gamble's board authorized proceeding with negotiations to buy the two drugmakers, whose combined market value as of Friday was about $140 billion.
The deal would have been a leap from Procter & Gamble's history as maker of many of the nation's most popular household brands, such as Crest, Crisco, Cover Girl, Metamucil, Pepto-Bismol, Tide, Ivory and Folgers. In one bold stroke, it would have turned a company best known for consumer marketing into one of the most influential players in the search for medical breakthroughs.
While Warner-Lambert and American Home Products have spent billions developing treatments for conditions such as osteoporosis, depression and diabetes, Procter & Gamble's proudest innovations of late include a statically charged dust mop and a do-it-yourself dry cleaning product.
In another sense, the merger would have been a natural progression for the drug industry, which has in recent years harnessed a Procter & Gamble style of mass marketing to promote prescription medicines directly to consumers.
For Procter & Gamble, which already does a relatively modest business in pharmaceuticals, the deal was a chance to stake a major claim in a rapidly expanding market. Since taking over as chief executive about a year ago, Jager has been on a mission to boost the company's slow-growing sales. According to the Wall Street Journal, that included an unsuccessful recent overture to Gillette, whose shaving products could have fit well in a shopping cart full of Procter & Gamble wares.
Procter & Gamble made it clear that it wasn't closing the door on other acquisitions, and late yesterday it issued a point-by-point explanation of how it might have benefited from the pharmaceutical deal. The company lamented that "due to legal and practical constraints, we were unable to communicate the benefits and underlying economic assumptions of this combination while talks were in progress."
A lawyer involved in the deal said Procter & Gamble was unable to counter the market's spin. "This shows what happens when you negotiate a deal in the newspapers," he said. "You can't tell your side of the deal, because there is no deal, and yet your stock is trading on rumors."
Whether the company could have changed any minds is questionable.
Procter & Gamble's stock had plunged from $117.75 on Jan. 11 to $94.81 1/4 early yesterday, before the New York Stock Exchange halted trading for the surprise announcement that the negotiations were dead.
"The currency with which they were going to pay for the transaction was devaluing before their eyes," said analyst Daniel Peris of Argus Research. Shareholders "felt that such a megamerger would not benefit them, at least in the near term, and they were probably right."
Investors "were caught off guard" by the scale of the proposed merger and by the dramatic movement toward pharmaceuticals, said Lyle Schonberger, an analyst at Olde Discount Corp. P&G's largest merger to date was its purchase of a pet food company for about $2 billion last year.
Investors fretted that the deal would dilute Procter & Gamble's earnings, analysts said.
In afternoon trading, after the deal was aborted, Procter & Gamble shares soared as high as $108.87 1/2 before closing at $102.87 1/2, down 37 1/2 cents. American Home Products shares fell 4.42 percent, and Warner-Lambert's shares fell 11.3 percent.
The two drug companies agreed to merge in November, but Pfizer interceded with a hostile offer of about $80 billion for Warner-Lambert. With the collapse of the Procter & Gamble negotiations, Warner-Lambert said it would continue discussions with Pfizer, but also explore other options. Procter & Gamble had represented an alternative to Pfizer's bid.
Washington Post Staff writer Ianthe Jeanne Dugan in New York contributed to this report.
CAPTION: Specialist Michael Bader, center, trades Procter & Gamble shares at the New York Stock Exchange before trading was briefly halted yesterday.