American Home Products, Warner-Lambert Agree to Merge in Stock Swap

American Home Products Corp. and Warner-Lambert Co. announced a merger Wednesday that would create the world’s largest drug company, with a combined market value of $145 billion and annual sales of well more than $20 billion.

The new company, which would be called AmericanWarner Inc., would have well-known consumer health brands such as Advil, Listerine, Halls, Robitussin, Rolaids, Chapstik and Preparation H.

Under the terms of the transaction, Warner-Lambert shareholders would receive 1.4919 shares of AmericanWarner for each Warner-Lambert share. American Home Products shareholders would receive AmericanWarner shares on a 1-for-1 basis. Each company’s shareholders would own about 50% of the combined company.

American Home Chairman John Stafford would become chairman of the combined company, and Warner-Lambert Chairman Lodewijk J.R. de Vink would be chief executive. De Vink is expected to take on the chairman’s role when Stafford, who has led American Home since 1986, retires.

The announcement came after the stock markets closed. But news that the two companies were talking about a deal came out earlier in the day, as the two companies acknowledged that they were discussing a merger. That boosted the companies’ share prices and appeared to do likewise for the rest of the pharmaceutical industry, in which mergers have been rampant throughout the decade.

Analysts generally responded warmly to the idea of a merger between American Home and Warner-Lambert, saying that the two New Jersey-based firms complement each other and that it would present opportunities for substantial cost-cutting.

“The merger, if it goes through, goes a long way to solving the problems of both companies,” said Mara Goldstein, analyst with CIBC World Markets.

The proposed merger will need the approval of the two firms’ stockholders and must pass regulatory scrutiny.

The drug industry consolidation trend, analysts say, is motivated not just by a desire to cut costs, but also by a need to build a large sales force to market drugs worldwide--something smaller companies cannot afford to do on their own. A merged Warner-Lambert-AHP would be able to use its combined sales force in lines such as cardiovascular drugs, where each has heart medications that do not compete and could be marketed together.

Warner-Lambert has emerged as a pharmaceutical giant primarily on the sales of Lipitor, the best-selling cholesterol-lowering drug in the U.S. Annual sales for the drug could exceed $3 billion, analysts say.

American Home Products lacks such a star, but it has a number of new products that appear to have strong potential, including a vaccine for bacterial pneumonia that has been recommended by the Centers for Disease Control for use in children age 5 and younger.

But some observers note that deals between American Home Products and two other potential partners, SmithKline Beecham and Monsanto, fell apart before the mergers were consummated.

And even when companies do combine, the benefits of such deals are not always realized quickly.

“We’ve seen these mergers time and again touted as being wonderful marriages,” said Mark Krensavage, an analyst at Brown Bros. Harriman & Co., “but mergers of equals are often very difficult to make work. One company needs to be in charge to cut costs.”

However, Wall Street tends to see such mergers favorably at least at first, he said.

And that was borne out in Wednesday’s trading. On the New York Stock Exchange, Warner-Lambert shares rose $5.38 to close at $83.81, up 6.85%, and American Home stock gained $5.63 to close at $56, up 11.2%.

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The Companies

at a Glance

American Home Products

* 1998 sales: $13.5 billion

* 1998 earnings: $2.5 billiion

Warner-Lambert

* 1998 sales: $10.2 billion

* 1998 earnings: $1.3 billion

Source: Hoover’s, IMS Health